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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, 1998
Commission File No. 0-7955
Mentor Corporation
5425 Hollister Avenue
Santa Barbara, California 93111
Telephone: 805/681-6000
A Minnesota Corporation I.R.S. Employer
Identification No. 41-0950791
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, par value $.10 per share
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the Registrant's
knowledge, in a definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K
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 26, 1998
was $554,076,000.
Number of Shares of Common Stock outstanding on June 26, 1998:
25,045,289.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1998
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 various
"forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which represent the
Company's expectations or beliefs concerning future events.
Statements containing expressions such as "believes",
"anticipates" or "expects" used in this Annual Report and such
other documents incorporated herein by reference are intended to
identify forward-looking statements. 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. All forward-
looking statements involve risks and uncertainties. Although the
Company believes its expectations are based upon reasonable
assumptions within the bounds of its knowledge of its business
and operations, there can be no assurances that actual results
will not materially differ from expected results. The Company
cautions that these and similar statements included in this
Annual Report are further qualified by important factors that
could cause actual results to differ materially from those in the
forward-looking statements. Such factors include, without
limitation, the following: increased competition, changes in
product demand, changes in market acceptance, new product
development, obtaining FDA approval of new and existing products,
changes in government regulation, supply of raw materials,
changes in reimbursement practices, adverse results of litigation
and other risks identified in this Annual Report or in other
documents filed by the Company with the Securities and Exchange
Commission. Readers are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date on
which they are made. The Company assumes no obligation to
publicly release any revisions to such forward-looking statements
to reflect changes in events or circumstances after such dates.
General
The Company develops, manufactures and markets a broad
range of products for the medical specialties of plastic and
reconstructive surgery, general surgery, urology and
ophthalmology. Plastic surgery products include surgically
implantable prostheses for cosmetic and reconstructive surgery,
principally breast implants and tissue expanders. General
surgery products includes capital equipment and disposable
products used in soft tissue aspiration. Urologic products
include disposable products for the management of urinary
incontinence, surgically implantable prostheses, principally
penile implants for the treatment of chronic male sexual
impotence, and brachytherapy seeds for the treatment of prostate
cancer. 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.
Corporate Organization
Prior to this year, the Company was operated through wholly-
owned subsidiaries which were organized around its three primary
product groups: plastic surgery (through Mentor H/S, Inc.),
urology (through Mentor Urology, Inc.) and ophthalmology (through
Mentor Ophthalmics, formerly known as Mentor O&O, Inc.).
During fiscal 1998, the Company reorganized along
functional lines, rather than product groups, enabling the
Company to present a unified, single company image to its
customers, as well as facilitate the sharing of technology and
manufacturing expertise among its various locations. As a result,
in August 1997, the Company formed Mentor Medical Inc. as a
wholly-owned subsidiary and transferred to it all the sales and
marketing functions, and related assets, from each of its product
subsidiaries. Mentor H/S, Mentor Urology and Mentor Ophthalmics
retained all of the assets related to the Texas, Minneapolis and
Norwell, Massachusetts manufacturing facilities, respectively.
These assets consisted primarily of leasehold improvements and
manufacturing and research and development equipment. Mentor H/S
was subsequently renamed Mentor Texas, Inc. Mentor Urology was
changed to Mentor Minnesota, Inc.
International Expansion
During the 1990's, the Company has expanded its
international presence through the establishment of direct sales
offices in Europe, Asia and Australia. All of the offices are
wholly-owned subsidiaries of Mentor Corporation. In fiscal 1991,
the Company established its first four sales offices: Mentor
Medical Systems Canada, Mentor Medical Systems UK, Ltd., Mentor
Deutschland, GmbH, and Mentor Medical Systems, Pty, Ltd.
(Australia). 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 late fiscal 1998,
the Company established a sales office in Japan: Mentor Japan
K.K.
In 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.
Acquisitions
During the 1990's, the Company has completed several
acquisitions relating to its urological and ophthalmological
operations. These acquisitions include the purchase in 1990 of
the assets of Teknar, Inc., a company which supplied diagnostic
ultrasound equipment for the specialties of urology and the 1994
purchase of the intraocular lens business of Optical Radiation
Corporation and ORC Caribe.
Principal Products and Markets
The Company strives to utilize its product design and
marketing capabilities, and its close working relationships with
health care professionals, to introduce products which provide
improved results for patients compared to existing treatment
methods and which can potentially reduce the overall cost of the
treatment. 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 and silicone gel
filled implants. 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 1998.
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.
General Surgery Products
In September 1997, the Company began marketing the
Contour Genesis, following FDA approval in July 1997. The
Contour Genesis is an ultrasound assisted product used for the
liquification and aspiration of soft tissues in general surgery
and plastic and reconstructive surgery applications. While
initial acceptance of the Contour Genesis has been favorable, the
Company believes that a greater potential for the product exists
in the area of liposuction. 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 January 1998, the FDA approved the Company's
Investigational Device Exemption to begin human clinical trials
using the Contour Genesis for ultrasonic assisted liposuction.
The Company is currently enrolling patients. There can be no
assurance as to when, if ever, final approval will be given.
Urology Products
The Company's Urology products fall into three general
categories of products: impotence treatment, incontinence
treatment, and cancer diagnosis and treatment 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 1998, 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.
In April 1998, Pfizer Inc., a major pharmaceutical
company, received FDA approval for the first oral drug treatment
for impotence. Their product, Viagra, has received an enormous
amount of media attention, due to its ease of use and purported
efficacy. While the Company believes that the heightened
interest in treating impotence may be beneficial to the Company
in the long run, there may be a near term negative impact on
sales as men who might be interested in an implant try Viagra
instead.
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 a variety of causes, ten million
men, women and children in the United States suffer from urinary
incontinence or retention -- the inability to control the flow of
urine. The Company markets 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 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 a suspension procedure, the bladder neck
and proximal urethra are lifted and suspended by a pair of
sutures attached to an anchor in the pubic bone. In April 1997,
the Company began marketing the Cinch bone anchor system, used to
anchor the sutures. In a pubovaginal sling procedure, a piece of
material is placed underneath the urethra and suspended from the
pubic bone, in a hammock-like fashion. This prevents the bladder
neck from descending during coughing or other stressful exertion.
In May 1998, the Company began marketing the Suspend for use in
sling procedures. This product is made from Tutoplast-processed
human fascia lata. The Tutoplast process inactivates pathogens
such as HIV and Hepatitis B and C, while preserving the collagen
matrix of the fascia, providing superior tensile strength
characteristics.
Cancer Products. In June 1997, the Company announced
two strategic alliances to launch its efforts in the treatment of
urologic cancers. The first alliance is with North American
Scientific, Inc. ("NASI") which produces brachytherapy seeds for
the treatment of prostate cancer. The conventional treatment for
prostate cancer has been the radical prostatectomy. This is an
invasive surgical procedure which involves the complete removal
of the prostate. It involves a 2-3 day hospital stay. Due to
the damage done to the urinary sphincter and penile nerves during
surgery, impotence and incontinence are common side effects of
the procedure.
Brachytherapy treatment is a much less invasive
procedure in which radioactive seeds, approximately the size of a
grain of rice, are implanted directly into the prostate. 50-100
seeds are used in each procedure. Because the radiation exposure
is limited to a small area, general radiation side effects are
unusual with brachytherapy, and complication rates are lower than
with a radical prostatectomy. The procedure can often be
performed in an outpatient setting, thus reducing the cost of the
overall procedure.
NASI manufactures and ships the seeds, while the
Company does all of the sales and marketing. Sales of this
product began in January 1998.
The second alliance is with Intracel Corporation in
which Mentor will be the exclusive world-wide marketing partner
for two of Intracel's bladder cancer products. The products were
originally developed by PerImmune Holdings, Inc. PerImmune
recently merged with Intracel. The first product is a bladder
cancer test, the Accu-Dx. The product is a simple urine test
which can be performed in the doctor's office. It is intended to
be used in conjunction with cystoscopy to aid in the management
of bladder cancer patients. This product was approved by the FDA
in April 1997, and Mentor began sales in February 1998. In
addition to the test, Intracel is developing a potential bladder
cancer treatment. This product, BCI-Immune Activator, has
demonstrated enhanced anti-tumor activity in the bladder. It has
completed Phase I and II clinical trials, and will begin Phase
III clinicals this spring. There can be no assurance as to when,
or if, this product will be approved by the FDA.
Ophthalmology Products
The Company's primary focus in ophthalmology is 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 diagnostic ultrasound equipment,
disposable products used during the surgery, phacoemulsification
to remove the cataract and IOLs.
In November 1996, the Company introduced its next
generation diagnostic ultrasound device, 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. The Company
also sells lint free surgical wipes and sponges, diamond blades
and knives, 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 most 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. It was approved by the FDA for sale in the United States
in December 1997. The market for IOL's has been shifting rapidly
from fixed lenses to foldable ones, which can be implanted
through a smaller incision. The MemoryLens is the first and only
lens to be prerolled at the factory, thereby facilitating the
surgical procedure.
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,
1998 1997 1996
(Dollars in thousands)
Amount Percent Amount Percent Amount Percent
Plastic surgery
products $107,160 50% $106,970 53% $89,215 50%
General surgery
products 5,289 2% - - - -
Urology products 67,818 32% 59,824 29% 54,127 30%
Ophthalmology products 35,029 16% 36,574 18% 34,474 20%
$215,296 100% $203,368 100% $177,816 100%
Marketing
The Company employs four specialized domestic sales
forces for its cosmetic surgery, urologic implants, disposable
incontinence 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 products, 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, 1998, 1997 and 1996, export sales to distributors were
$29,300,000, $29,437,000 and $26,223,000, respectively. In
addition, $26,489,000, $20,526,000 and $14,140,000 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,
Spain and Japan. The Spain office was opened in fiscal 1997,
while Japan was established late in fiscal 1998. 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 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
or physical damage to the plant. See "Manufacturing".
During the fiscal year ended March 31, 1998, 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., Bausch & Lomb,
Inc., Pharmacia, Upjohn, Inc. and Staar Surgical Company.
While the Company believes it competes successfully in
its markets, many of its competitors have substantially greater
financial, technological and marketing resources.
Government Regulation
General
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, process 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.
Medical Device Amendments of 1976
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" ("GMP") 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. Class III
devices 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 were enrolled, beginning in 1993, in
clinical studies for future follow-up. Patients were required to
sign an informed consent form and physicians had to certify that
saline implants were not a satisfactory alternative. The Company
continues to ship these products under the terms of this clinical
study.
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 has submitted all required
data to date (primarily laboratory tests and manufacturing data)
and intends to submit the remaining data for its PMAA's in a
timely fashion, which it expects will be by the end of the
calendar year. 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.
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.
Additional Regulations
The Safe Medical Device Act of 1990 (the "Act") affects
medical device manufacturers in several areas, including post-
market surveillance and device tracking procedures. The Act is
the first major change to the Federal Food, Drug and Cosmetic Act
since the 1976 Amendments. The Act gives the FDA expanded
emergency recall authority, requires that a summary be made
available of the safety and effectiveness in the 510(k) process
and adds design validation as a requirement of Good Manufacturing
Practices. The Act also grants the FDA the authority to require
manufacturers to conduct post-market surveillance on most
permanent implants and devices that potentially present a serious
risk to human health.
The Company is positioning itself for the changing
international regulatory environment. The Company is currently
in the process of obtaining a "CE" mark for all of its products.
The CE mark is obtained by demonstrating compliance with the
quality system standards developed by the International Standards
Organization ("ISO") and for medical device manufacturers, the
medical Device Directive promulgated by the European Union.
These standards are defined under the ISO 9000, 9001 and 9002 and
EN46001 regulations. After June 1998, manufacturers may not sell
to members of the European Union products which do not bear a CE
mark. All of the Company's products currently bear a CE
mark, with the exception of several minor ophthalmic products.
The Company expects to complete the CE marking of all of its
products by the end of calendar 1998.
Medical device laws and regulations similar to those
described above are also in effect in some of the other 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.
Texas Facility Review
In June 1995, Mentor H/S's Texas facility was audited
by the FDA. As a result of that audit, 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. Specifically, the
FDA disagreed with the method by which the Company had performed
its initial validations of the Texas facility. 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 had initiated or completed all
corrections called for in the report. For those issues which
were not complete, primarily the re-validation of the
manufacturing process, 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 August 1997, the FDA returned to the Texas facility
to perform a comprehensive GMP audit, which included reviewing
the Company's progress in completing the remaining items
contained in the 1996 warning letter. While the Company had
completed a substantial amount of such items, the re-validation
effort had not been completed within the time frame outlined in
the 1996 report. In December 1997, the Company developed a new
timeline for completion of these items, which included quarterly
meetings with the FDA to discuss the Company's progress. In May,
1998, subsequent to the end of the fiscal year, the Company
entered into a voluntary consent decree with the FDA, under which
the Company agreed to complete the re-validations in the agreed
upon timeframe. The consent decree also calls for the Company to
hire an outside expert consultant, which has been retained. By
July 5, 1998, the consultant must conduct a comprehensive GMP
audit of the Texas facility and submit a detailed written report
to the FDA on its findings. The consultant shall repeat the
audit on an annual basis. The Company must also establish
procedures for a continuous corrective action program and to
ensure that all validated processes remain validated over time.
Should the Company fail to complete these items in a timely
manner, the consent decree allows the FDA to order the Company to
stop manufacturing or distributing breast implants, order a
recall or take other corrective actions. The Company may also be
subject to penalties of $10,000 per day until the task is
completed. While the Company believes that it will be able to
complete such items in the necessary timeframe, there can be no
assurance that such timeframes can actually be met.
Environmental Regulation
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. In the majority of cases, the Company has successfully
obtained reinstatement of reimbursement for these products. 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, 1998, the Company employed 113 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 general surgery and
ophthalmology. In addition, the Company has committed to help
fund the Phase III clinical trials for the BCI-Immune Activator
bladder cancer treatment. The trials are being conducted by
Intracel. The Company will pay $1 million per year for three
years, plus an additional $3 million based on the achievement of
certain milestones.
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 1998, 1997 and 1996, the Company spent a
total of $19,318,000, $17,449,000 and $13,379,000 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 soft tissue aspiration, 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. In certain circumstances, the Company will
provide financial assistance to defray the costs of a
reoperation. The Company provides a limited warranty on certain
of its capital equipment products, such as the Contour Genesis,
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 mid 90's, 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 perceived 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
price 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, 1998, the Company employed 1,612 people
of whom 1,108 were in manufacturing, 320 in sales and marketing,
113 in research and development and 71 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 (161,965 square feet). The
Company leases additional office manufacturing and warehouse
facilities in Santa Barbara, California (78,000 square feet),
Mounds View, Minnesota (20,000), Irving, Texas (139,109 square
feet), Norwell, Massachusetts (57,000 square feet), Cidra, Puerto
Rico (47,000 square feet) and Leiden, the Netherlands (15,000
square feet). The Company's international sales offices 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. These actions can be
brought by an individual, or by a group of patients purported to
be a class action. 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.
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 26, 1998, are listed below, followed by brief
accounts of their business experience and certain other
information.
Name Age Position
Christopher J. Conway 59 Chairman of the Board, Chief
Executive Officer and Director
Anthony R. Gette 42 President, Chief Operating Officer,
Secretary and Director
Malcolm Boddy 56 President, Mentor Manufacturing
Operations Division
Gary E. Mistlin 46 Vice President, Finance/Treasurer
and Chief Financial Officer
Bobby K. Purkait 48 Vice President, Research &
Development
Ramona E. Schwab 37 Vice President, 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. Boddy joined the Company in July 1997 as Senior
Vice President of Manufacturing Operations. He was promoted to
President, Mentor Manufacturing Operations Division in February
1998. From 1994 to 1997 he was Vice President, Operations of the
Renal Products Division of National Medical Care, a subsidiary of
W.R. Grace & Co.
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.
Year Ended March 31, 1998 High Low
Quarter ended June 30, 1997 29 5/8 19 1/4
Quarter ended September 30, 1997 33 3/4 29
Quarter ended December 31, 1997 40 1/8 30 1/2
Quarter ended March 31, 1998 36 5/8 24 1/8
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 3/8
Quarter ended March 31, 1997 30 21 5/8
(b) As of June 26, 1998 there were 1,800 holders of record
of the Company's Common Stock.
(c) In fiscal 1998 and fiscal 1997, 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)
1998 1997 1996 1995 1994
Statement of Income Data:
Net sales $215,296 $203,368 $177,816 $146,394 $123,586
Gross profit 137,566 135,907 117,550 93,598 81,131
Operating income 34,688 42,281 37,121 27,043 19,984
Income before income taxes 36,329 42,446 36,140 24,221 16,844
Net income $ 23,897 $ 27,870 $ 23,819 $ 15,773 $ 11,005
Basic earnings per share $ 0.96 $ 1.12 $ .99 $ .73 $ .52
Diluted earnings per share $ 0.91 $ 1.06 $ .91 $ .67 $ .49
Dividends per common share $ .10 $ 0.10 $ 0.10 $ 0.075 $ _
Average outstanding shares:
Basic 24,894 24,863 24,163 21,640 21,356
Diluted 26,330 26,349 26,412 25,306 24,542
Balance Sheet Data:
Working capital $ 94,907 $ 88,171 $ 70,135 $ 53,745 $ 39,721
Total assets 201,373 166,645 149,618 128,760 120,750
Long-term debt, less current
portion - 8 58 24,655 25,386
Shareholders' equity $164,685 $138,349 $116,495 $ 71,114 $ 54,653
SALES BY PRINCIPAL PRODUCT
LINE
Year Ended March 31,
(in thousands) 1998 1997 1996
Amount Percent Amount Percent Amount Percent
Plastic Surgery
Products $107,160 50% $106,970 53% $ 89,215 50%
General Surgery
Products 5,289 2% - - - -
Urology Products 67,818 32% 59,824 29% 54,127 30%
Ophthalmology
Products 35,029 16% 36,574 18% 34,474 20%
$215,296 100% $203,368 100% $177,816 100%
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,
1998 1997 1996
Net sales 100.0% 100.0% 100.0%
Cost of sales 36.1 33.2 33.9
Selling, general and administrative 38.8 37.4 37.7
Research and development 9.0 8.6 7.5
Operating income 16.1 20.8 20.9
Interest income (expense), net .6 .2 (0.4)
Other expense .2 (0.1) (0.2)
Income before income taxes 16.9 20.9 20.3
Income taxes 5.8 7.2 6.9
Net income 11.1% 13.7% 13.4%
RESULTS OF OPERATIONS
Sales
Sales for fiscal 1998 increased from $203.4 million in 1997 to
$215.3 million, an increase of 6%. Sales of urology products
increased 13%, as both sales of disposable incontinence products
and penile implants increased over the prior year. Included in
urological product sales was approximately $700 thousand in
brachytherapy seeds, a product which is used to treat prostate
cancer, and which was introduced in January 1998. Ophthalmic
product sales decreased 4% over the prior year. Increased
international sales of the MemoryLens foldable intraocular lens,
coupled with the United States launch of the MemoryLens in
January 1998, following FDA approval, were offset by significant
declines in sales of fixed intraocular lenses. Plastic surgery
products sales were relatively unchanged from the prior year.
Plastic surgery product sales were affected by a small fire at
the Company's Texas facility, which occurred in August 1997. The
fire caused the shutdown of certain production departments in
September and October. See "Cost of Sales". As a result, the
Company was temporarily unable to meet all of its demand for
certain mammary implants, especially silicone-gel filled
products. Production was back to normal levels by the end of the
fiscal year, although significant backorders still existed as of
that date. During the second quarter of fiscal 1998, the Company
introduced its first general surgery product, the Contour Genesis
soft tissue aspiration system. The Contour Genesis, and related
accessories, generated $5.3 million in sales for fiscal 1998.
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 the prior year. Ophthalmic product sales increased
6% over the prior year, primarily due to increased international
sales of the MemoryLens.
The Company's export sales to unaffiliated customers accounted
for 14%, 14% and 15% of net sales in the fiscal years ended March
31, 1998, 1997 and 1996, respectively. In addition, 12%, 10% and
7% in sales respectively, were from the Company's direct
international sales offices.
Over the three fiscal years ended March 31, 1998, sales increases
have been primarily the result of increased unit sales and a
shift to higher priced products. General selling price increases
have not been significant in recent years.
Cost Of Sales
Cost of sales was 36.1% of net sales for fiscal 1998, compared to
33.2% for the prior year. The increase was primarily related to
a Company's previously reported fire at fire at the Company's
Texas manufacturing facility. Several production areas were
affected by the fire and many of the production departments were
shut down for the month of September, and, depending on the
department, in October and November. The higher level of cost of
sales for the year was caused by unabsorbed overhead due to a
lack of production, combined with inefficiencies upon production
startup.
The Company filed an insurance claim at the end of the year for
property damage repair, loss of inventory destroyed by the fire
and business interruption. Based on an initial progress payment
of $1 million and representations from the insurance carrier, the
Company recorded $1.6 million in fiscal 1998 to cover property damage
losses. An additional $1.6 million to offset business interruption losses
was recorded as a reduction to the cost of sales in the fourth
quarter of fiscal 1998. In the first quarter of fiscal 1999, the
Company settled its claim with the insurance carrier for a total
of $6 million. The additional $2.8 million not already accounted
for in fiscal 1998 will be included in the results for fiscal
1999. This amount will be used to offset continuing extra
expenses resulting from the fire.
In addition, during fiscal 1998 the Company began to spend a
significant amount of funds in re-validating its manufacturing
processes at its Texas facility. In 1996, the Food and Drug
Administration ("FDA") issued the Texas facility a warning
letter, citing several inadequacies in the Company's adherence to
FDA Good Manufacturing Practices. The FDA was specifically
concerned with the method by which the Company had performed its
initial validation of the manufacturing processes in the Texas
facility. The Company agreed to re-validate the facility, as
well as correct the other items in the warning letter, and in
July, 1996, submitted to the FDA a schedule for completion of
these items. In August 1997, the FDA returned to the Texas
facility to perform a comprehensive GMP compliance audit, which
included reviewing the Company's progress in completing the
remaining items contained in the 1996 warning letter. While the
Company had completed a substantial amount of items, the re-
validation effort had not been completed within the time frame
outlined in the July 1996 schedule. In December 1997, the
Company developed a new timeline for completion of these items,
which included quarterly meetings with the FDA to discuss the
Company's progress. The Company has committed a variety of
resources to the re-validation and GMP compliance effort,
including the hiring of additional staff, use of outside
consultants and extensive testing of work in process and finished
goods. In May, subsequent to the fiscal year end, the Company
entered into a voluntary consent decree with the FDA, which,
among other things, requires the Company to complete the re-
validations in the timeframe set forth in the decree. Should the
Company fail to complete these items in a timely manner, the
consent decree allows the FDA to order the Company to stop
manufacturing or distributing breast implants, order a recall or
take other corrective actions. The Company may also be subject
to penalties of $10,000 per day until the task is completed.
While the Company believes that it will be able to complete such
items in the necessary timeframe, there can be no assurance that
such timeframes can actually be met.
Cost of sales was 33.2% of net sales for fiscal 1997, compared to
33.9% for the prior year. The Company continued 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 discontinuation of several low margin ophthalmic
diagnostic products.
Selling, General and Administrative
Selling, general and administrative expenses increased to 38.8%
of net sales in fiscal 1998, compared to 37.4% the prior year.
The increase relates primarily to the Company's efforts in
launching two new products, the Contour Genesis and the
MemoryLens.
Selling, general and administrative expenses decreased to 37.4%
of net sales in fiscal 1997, compared to 37.7% in the previous
year. A small increase in sales and marketing expense, due to
new product introductions, was offset by productivity increases
in administrative areas.
Research and Development
Research and development expenses were 9.0% of net sales in
fiscal 1998, up from 8.6% 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 development
dollars on the Contour Genesis soft tissue aspiration system and
related disposables, and the MemoryLens, both introduced in
fiscal 1998.
The Company expects to complete the work on its saline filled
breast implant PMAAs and submit the data to the FDA in fiscal
1999.
Research and development expenses were 8.6% of sales in fiscal
1997, compared to 7.5% in fiscal 1996. The increases were
primarily related to development of the Contour Genesis, the
Advent A/B ophthalmic ultrasound and the Mentor SIStem
phacoemulsifier. The later two products were introduced in 1997.
Interest and Other Income and Expense
Interest expense was $27 thousand in fiscal 1998, a decrease from
$559 thousand in fiscal 1997. During fiscal 1997, the Company
paid the remaining portion of its monetary obligations
("Obligation") under the terms of its fiscal 1994 agreement
settling breast implant claims against the Company. This had
accounted for $383 thousand of interest expense in 1997.
Interest income increased to $1.4 million in 1998 from $812
thousand in fiscal year 1997, resulting from higher cash
balances. Other income and expense primarily includes gains or
losses on disposals of assets, and foreign currency gains or
losses related to the Company's foreign operations.
Interest expense was $559 thousand in fiscal 1997, a decrease
from $1.1 million in fiscal 1997. Due to the conversion of the 6
3/4% 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 for the
year was $383 thousand in imputed interest on the Obligation, a
decrease from $727 thousand the prior year. The Obligation was
paid in full in fiscal 1997.
Interest income increased to $812 thousand in 1997 from $440
thousand in fiscal 1996, resulting from higher cash balances.
Income Taxes
The effective rate of corporate income taxes was 34% for fiscal
1998, 1997 and 1996.
Net Income
Diluted earnings per share in fiscal 1998 were $.91, compared to
$1.06 in fiscal 1997. Increased sales were offset by higher
costs, primarily related to the Texas manufacturing facility.
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, 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the three years ended March 31, 1998, liquidity needs have
been satisfied principally by cash flow from operations.
At March 31, 1998, working capital was $94.9 million compared to
$88.2 million the previous year. The Company generated $26.5
million of cash from operations during fiscal 1998, compared to
$26.4 million the previous year. Lower net income and higher
growth in inventory were offset by reduced growth in receivables
and an increase in accounts payable.
During fiscal 1998 the Company spent $17.9 million on capital
expenditures and intangibles. The majority of the funds were for
capacity expansion in manufacturing facilities, primarily Puerto
Rico and Minneapolis, and equipment and data processing hardware
and software. The Company anticipates investing approximately
$12 million in facilities and capital equipment in fiscal 1999.
During fiscal 1998, 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 1998, nor any
balance outstanding at March 31, 1998. In fiscal 1999, the
annual commitment fee will be reduced to .125%.
During the first quarter of fiscal 1998, the Company entered into
two new product alliances. As part of an agreement with North
American Scientific Inc. ("NASI"), the Company invested $1
million in NASI common stock. The Company is the exclusive
distributor of brachytherapy seeds manufactured by NASI for the
treatment of prostate cancer. Similarly, the Company has
invested $6 million in Intracel, its marketing partner for a new
bladder cancer test and potential bladder cancer treatment. The
Intracel agreement also requires the Company to pay $1 million a
year for three years to defray the costs of the clinical trials
for the cancer treatment product, beginning in January 1998, as
well as pay an additional $3 million upon the completion of
certain milestones. The Company expects to pay the first
milestone payment of $1 million in fiscal 1999.
The Company's Board of Directors has authorized an ongoing stock
repurchase program. It is the general philosophy of the Company
to repurchase a similar number of shares, subject to market
conditions and cash availability, as are issued for the exercise
of stock options previously granted to employees of the Company
under existing stock option plans. During fiscal 1998 the
Company repurchased 169,500 shares for an aggregate consideration
of $4.1 million. During fiscal 1997, 295,000 shares were
repurchased for $6.9 million.
The Company's principal source of liquidity at March 31, 1998
consisted of $27.9 million in cash and short term marketable
securities plus $15.0 million available under the existing line
of credit. The Company believes that funds generated from
operations, its cash and marketable securities and funds
available under its line of credit will be adequate to meet its
working capital and capital expenditure requirements through
fiscal 1999.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs which were
written using two digits rather than four to determine the
applicable year. Any computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or
miscalculations causing disruptions to operations, including
temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company utilizes a variety of programs across its various
domestic and international entities for its core systems of
distribution, finance and manufacturing. The Company has
completed an assessment of its core software. While it has
determined that the majority of these systems are Year 2000
compliant, it will have to modify certain portions of some of the
these systems in order for them to function properly with respect
to dates in the year 2000 and thereafter. Because the Company's
computer programs consist predominantly of packaged software for
which the majority of the vendor's offer a Year 2000 upgrade, and
the Company believes that it can implement the necessary
modifications primarily using the Company's personnel, the cost
of the Year 2000 software upgrade is not expected to have a
material impact on the Company's results of operations, liquidity
or capital resources.
It is anticipated that the Year 2000 project will be completed
not later than the middle of calendar 1999, which is prior to any
anticipated impact on its operating systems. The Company
believes that with modifications to the existing core computer
systems, the Year 2000 Issue will not pose a significant
operational problem. However, if such modifications are not
completed timely, the Year 2000 Issue could have a material
impact on the operations of the Company.
In addition, each company the Company conducts business with,
such as banks, payroll processors, vendors and customers, must
address their own Year 2000 issue. While the Company can take
certain steps to assess the compliance status of these entities,
it cannot insure that all of these will eventually be compliant.
This may affect the ability of the Company, among other things,
to obtain critical supplies or receive payment on outstanding
invoices. Depending on the extent of such issues, this could
have a material adverse effect on the Company's results of
operations and liquidity.
The costs of the project and the date on which the Company
believes it will complete the Year 2000 project are based on
management's best estimates, which assume certain future events,
including the continued availability of certain resources.
However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material
differences include, but are not limited to, the availability and
cost of personnel trained in this area, the effectiveness of the
upgrades received from the Company's software vendors at
addressing the Year 2000 issue, the results of the in-progress
assessment and similar uncertainties.
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, consent decrees 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, 1998 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, 1998.
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, 1998.
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, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a)(1) Consolidated Financial Statements
Report of Independent Auditors
Consolidated Statements of Financial Position
as of March 31, 1998 and 1997
Consolidated Statements of Income for the
Years Ended March 31, 1998, 1997, and 1996
Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended March 31, 1998, 1997, and
1996
Consolidated Statements of Cash Flows for the
Years Ended March 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(a)(2) Consolidated Financial Statement Schedules
Schedule II - 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)
10(a) Mentor Corporation Restated 1987 Non-
Statutory Stock Option Plan and Agreement -
Registration Statement No. 33-25865.(8)(10)
10(b) Mentor Corporation 1991 Stock Option
Plan - Registration Statement No. 33-48815.(9)(10)
10(c) Stock Option Agreement, dated September
21, 1988, between Mentor Corporation and Anthony
R. Gette.(2)(10)
10(d) Lease Agreement, dated November 9, 1989,
between Mentor Corporation and Skyway Business
Center Joint Venture.(3)
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (continued)
10(e) First Amendment to Lease Agreement,
dated December 1, 1993, between Mentor corporation
and Skyway Business Center Joint Venture. (6)
10(f) Credit Agreement, dated May 22, 1995,
between Mentor Corporation and Sanwa Bank
California (7)
10(g) $15,000,000 Revolving Note, dated May
22, 1995, between Mentor Corporation and Sanwa
Bank California (7)
10(h) Security Agreement, dated May 22, 1995,
between Mentor Corporation and Sanwa Bank
California (7)
10(i) Guarantor Security Agreement, dated May
22, 1995, between Mentor Corporation and its
subsidiaries and Sanwa Bank California (7)
10(j) Guaranty Agreement, dated May 22, 1995,
between Mentor Corporation and Sanwa Bank
California (7)
10(k) Contribution Agreement, dated May 22,
1995, between Mentor Corporation and Sanwa Bank
California (7)
10(l) Inter-Company Note, dated May 22, 1995,
between Mentor Corporation and Sanwa Bank
California (7)
10(m) Lease Agreement, dated July 23, 1990,
between Mentor Corporation and SB Corporate
Center, Ltd.(4)
10(n) Employment Agreement, dated August 5,
1994, between Mentor O&O, Inc. and William M.
Freeman. (7)(10)
10(o) Employment Agreement, dated October 30,
1997, between Mentor Corporation and Malcolm
Boddy. (10)
21 Subsidiaries of the Company
23 Consent of Independent Auditors
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (continued)
(1) Incorporated by reference to Exhibits to Annual Report on
Form 10-K for the year ended March 31, 1988, File No. 0-
7955.
(2) Incorporated by reference to Exhibits to Annual Report on
Form 10-K for the year ended March 31, 1989, File No. 0-7955
(3) Incorporated by reference to Exhibits to Annual Report on
Form 10-K for the year ended March 31, 1990, File No. 0-
7955.
(4) Incorporated by reference to Exhibits to Annual Report on
Form 10-K for the year ended March 31, 1991, File No. 0-
7955.
(5) Incorporated by reference to Exhibits to Annual Report on
Form 10-K for the year ended March 31, 1993, File No. 0-
7955.
(6) Incorporated by reference to Exhibits to Annual Report on
Form 10-K for the year ended March 31, 1994, File No. 0-
7955.
(7) Incorporated by reference to Exhibits to Annual Report on
Form 10-K for the year ended March 31, 1995, File No. 0-
7955.
(8) Incorporated by reference to the post effective amendment
No. 1 to Registration Statement on Form S-8, Registration
No. 33-25865.
(9) Incorporated by reference to Registration Statement on Form
S-8, Registration No. 33-48815
(10) Management contract or compensatory plan or arrangement.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Mentor Corporation
We have audited the accompanying consolidated statements of
financial position of Mentor Corporation as of March 31, 1998 and
1997, 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, 1998. Our audits also
included the financial statement schedule listed in the Index
at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and
schedule 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, 1998 and
1997, and the consolidated statements of income and cash flows
for each of the three years in the period ended March 31, 1998,
in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Los Angeles, California
May 5, 1998
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(dollars in thousands) March 31,
Assets 1998 1997
Current assets:
Cash and equivalents $ 16,334 $ 16,156
Marketable securities 11,603 11,652
Accounts receivable, net of allowance for doubtful
accounts of $2,798 in 1998 and $2,403 in 1997 40,209 37,961
Inventories 44,632 38,205
Deferred income taxes 6,619 6,282
Other 8,144 5,502
Total current assets 127,541 115,758
Property and equipment, net 39,423 31,328
Intangibles, net 5,530 4,616
Goodwill, net 13,619 14,218
Long-term marketable securities and investments 14,806 -
Other assets 454 725
$201,373 $166,645
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued liabilities $ 30,625 $ 26,819
Income taxes payable 1,325 90
Dividends payable 634 628
Short-term bank borrowings and current
portion of long-term debt 50 50
Total current liabilities 32,634 27,587
Long-term deferred income taxes 4,054 701
Long-term debt _ 8
Shareholders' equity:
Common Stock, $.10 par value: Authorized-
50,000,000 shares; Issued and outstanding --
25,020,690 shares in 1998; 2,502 2,481
24,806,748 shares in 1997
Capital in excess of par value 35,189 34,565
Cumulative translation adjustment (1,404) (693)
Unrealized gain on investments 5,000 -
Retained earnings 123,398 101,996
164,685 138,349
$201,373 $166,645
See notes to consolidated financial statements.
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended March 31,
(in thousands, except per share data) 1998 1997 1996
Net sales $215,296 $203,368 $177,816
Costs and expenses:
Cost of sales 77,730 67,461 60,266
Selling, general and
administrative 83,560 76,177 67,050
Research and development 19,318 17,449 13,379
180,608 161,087 140,695
Operating income 34,688 42,281 37,121
Interest income 1,362 812 440
Interest expense (27) (559) (1,092)
Other income (expense) 306 (88) (329)
Income before income taxes 36,329 42,446 36,140
Income taxes 12,432 14,576 12,321
Net income $ 23,897 $ 27,870 $ 23,819
Net income per share:
Basic earnings per share $ .96 $ 1.12 $ .99
Diluted earnings per share $ .91 $ 1.06 $ .91
See notes to consolidated financial statements.
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
Common Shares
Common Unrealized
Stock Capital Gain and
Common $.10 in Excess Cumulative
Shares Par of Par Translation Retained
(in thousands) Outstanding Value Value Adjustment Earnings
Balance April 1, 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) $101,996
Exercise of stock options 383 38 2,985
Income tax benefit arising
from the exercise of stock
options 1,703
Repurchase of common shares (169) (17) (4,064)
Dividends declared ($.10 per
share) (2,495)
Foreign currency translation
adjustment (711)
Unrealized gain on
investments 5,000
Net income 23,897
Balance March 31, 1998 25,021 $2,502 $ 35,189 $ 3,596 $123,398
See notes to consolidated financial statements.
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
(in thousands) 1998 1997 1996
Cash From Operating Activities:
Net income $ 23,897 $ 27,870 $23,819
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 7,443 6,273 5,382
Amortization 1,664 1,488 1,791
Deferred income taxes 216 3,212 (957)
Loss on sale of assets 239 42 79
Expenses not requiring the use of cash _ 383 727
Litigation settlement obligation _ (5,333) (5,333)
Changes in operating assets and
liabilities:
Accounts receivable (2,248) (3,106) (4,797)
Inventories and other current assets (9,069) (5,406) (5,763)
Accounts payable and accrued liabilities 3,093 1,282 4,931
Income taxes payable 1,236 (338) (178)
Net cash provided by operating
activities 26,471 26,367 19,701
Cash From Investing Activities:
Purchases of property and equipment (15,787) (8,329) (9,612)
Purchases of intangibles and goodwill (2,115) (2,524) (234)
Proceeds from sale of property, equipment
and other assets 16 3 764
Increase (decrease) in other assets 311 (67) 108
Purchases of marketable securities (9,073) (10,348) (15,275)
Sales of marketable securities 9,213 9,400 6,600
Investment in manufacturing partners (7,006) - -
Net cash used for investing activities (24,441) (11,865) (17,649)
Cash From Financing Activities:
Repurchase of common stock (4,081) (6,948) (3,469)
Proceeds from exercise of stock options 4,726 3,668 3,162
Dividends paid (2,489) (2,488) (2,402)
Reduction in long-term debt (8) (415) (856)
Net cash used for financing activities (1,852) (6,183) (3,565)
Increase (decrease) in cash
and equivalents 178 8,319 (1,513)
Cash and equivalents at beginning of year 16,156 7,837 9,350
Cash and equivalents at end of year $ 16,334 $ 16,156 $ 7,837
See notes to consolidated financial statements.
MENTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
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 and Long-term investments
The Company considers its marketable securities available-for-
sale as defined in Statement Financial Accounting Standards
("SFAS") No. 115. Realized gains and losses and declines in value
considered to be other than temporary are included in income. The
cost of securities sold is based on the specific identification
method. For short term marketable securities 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, 1998. The Company's current marketable securities
consist primarily of municipal bonds that are of limited credit
risk and have contractual maturities of less than two years.
The Company's long-term marketable securities and investments
include a $6 million equity interest, at cost, as quoted market
prices are not available, in Intracel Corporation, the Company's
business partner for a new bladder cancer test and potential
bladder cancer treatment. Also included is an equity interest in
North American Scientific Inc., the Company's manufacturing
partner under an exclusive agreement for the distribution of
brachytherapy seeds for the treatment of prostate cancer. The
Company's investment ($1 million cost) in North American
Scientific is recorded at its fair market value of $8.8 million,
based upon quoted market prices. The unrealized gain of $5.0
million, net of taxes, is reported as a separate component of
shareholders' equity.
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 is 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 shorter of their estimated remaining lives
or lease term. 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 $6,637,000 at March
31, 1998 and $10,768,000 at March 31, 1997. 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 $3,656,000 at March 31,
1998 and $3,050,000 at March 31, 1997. The Company periodically
reviews goodwill and its other intangibles to assess
recoverability. Impairments would be recognized in operating
results if a permanent diminution in value were to occur.
Other Assets
Included in other assets is a $2.2 million receivable related to
a property insurance and business interruption claim. In August
1997, the Company experienced a small fire in its Texas facility.
Several production departments were damaged and shut down for
several months. An insurance claim was filed at the end of
fiscal 1998 to reimburse the Company for property damage repair,
loss of inventory destroyed by the fire and business
interruption. Based on an initial progress payment of $1 million
and representations from the insurance carrier, the Company
recorded $1.6 million to cover property damage and inventory
losses. An additional $1.6 million to offset business
interruption losses was recorded as a reduction to cost of sales
in the fourth quarter of fiscal 1998. As of March 31, 1998, the receivable
represents the amount expected, $3.2 million, less the $1 million receipt.
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.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" 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
Export sales to independent distributors, principally to Canada
and Western Europe, were $29,300,000, $29,437,000 and $26,223,000
in 1998, 1997 and 1996, respectively. In addition, $26,489,000,
$20,526,000 and $14,140,000 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. Transaction
exchange gains and losses were immaterial. Net assets and the
results of operations of the Company's foreign entities were not
significant on a consolidated basis.
Future Accounting Requirements
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130), and No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131),
were issued in June 1997. The disclosures required by these
statements are under review by the company and must be reported
in fiscal 1999. The adoption of these statements will have no impact on
the Company's consolidated results of operations, financial
position or cash flows.
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, 1998, and the reported amounts of
revenues and expenses during the year then ended. Actual results
could differ from those estimates.
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) 1998 1997
Raw materials $ 12,900 $ 12,477
Work in process 6,682 5,379
Finished goods 25,050 20,349
$ 44,632 $ 38,205
Note C Property and Equipment
Property and equipment at March 31, consisted of:
(in thousands) 1998 1997
Land $ 231 $ 231
Buildings 4,662 3,801
Leasehold improvements 13,508 11,913
Furniture, fixtures and equipment 43,910 39,007
Construction in progress 9,165 4,339
71,476 59,291
Less accumulated depreciation
and amortization (32,053) (27,963)
$ 39,423 $31,328
Note D Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities at March 31, consisted
of:
(in thousands) 1998 1997
Trade accounts payables $ 6,903 $ 4,443
Accrued compensation 8,742 8,560
Sales returns 5,961 5,791
Self insured retention 3,580 3,400
Accrued royalties 1,598 1,644
Other 3,841 2,981
$ 30,625 $26,819
Note E Long-Term Debt
Long-term debt at March 31 consisted of:
(in thousands) 1998 1997
City of Minneapolis, Minnesota
Industrial Development Revenue
Bonds, at 7.5% payable through
1998 $ 50 $ 58
Less current portion (50) 50
$ 0 $ 8
At March 31, 1998, 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, 1998, the Company had no
amounts outstanding under its line of credit. The Industrial
Development Revenue Bonds were retired subsequent to year end.
Note F Stock Options
The Company has granted options to key employees and non-employee
directors under a qualified 1991 Plan and a non-qualified 1987
Plan. Options granted under both plans are exercisable in four
equal cumulative installments beginning one year from the date of
grant, and expire in ten years. Options are granted at the
fair market value on the date of grant. Activity in the stock
option plans during fiscal 1998, 1997 and 1996 was as follows:
Options Outstanding
Weighted
Average
Number of Price per
Shares Share
Balance April 1, 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
Granted 592,550 22.79
Exercised (383,441) 7.50
Canceled or terminated (56,496) 17.91
Balance March 31, 1998 2,818,893 $ 12.76
At March 31, 1998 and 1997 there were 2,302,950 shares and
2,839,000 shares available for grant under the 1991 Plan. There
are no additional shares available for grant under the 1987 Plan.
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, 1998, 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 stock option granted were
estimated at the date of grant using the Black-Scholes option
valuation model and the following actuarial assumptions:
1998 1997 1996
Weighted average fair
value of stock
options granted 13.18 12.59 5.95
Risk-free interest rate 6.6% 6.7% 6.7%
Expected Life (in years) 6.8 6.5 6.5
Expected volatility .531 .482 .473
Expected dividend yield 0.4% 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 1998, 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):
Year ended March 31, 1998 1997 1996
Net income: as reported $23,897 $27,870 $23,819
Net income: Pro forma $21,599 $26,700 $23,602
Basic earnings per share: as reported $ .96 $ 1.12 $ .99
Basic earnings per share: Pro forma $ .87 $ 1.07 $ .98
Diluted earnings per share: as reported $ .91 $ 1.06 $ .91
Diluted earnings per share: Pro forma $ .83 $ 1.03 $ .91
Information regarding stock options outstanding as of March 31,
1998 is as follows:
-------Options Outstanding-------- Options Exercisable
Weighted-
Average Weighted- Weighted-
Remaining Average Number Average
Number of Contractual Exercise of Exercise
Price Range Shares Life Price Shares Price
Under $7.00 1,061,932 4.1 years $ 6.15 988,432 $ 6.10
$7.00 to $20.00 795,036 4.5 years $ 9.44 592,836 $ 8.78
Over $20.00 961,925 8.8 years $ 23.00 90,375 $ 23.33
At March 31, 1998, 1997 and 1996 stock options to purchase
1,698,000, 1,673,000 and 1,512,000 shares were exercisable at
weighted-average prices of $7.96, $6.81, and $6.53, respectively.
Note G Income Taxes
Year Ended March 31,
(in thousands) 1998 1997 1996
Current:
Federal, including U.S. possession $11,171 $ 10,225 $11,866
State 1,045 1,138 930
12,216 11,363 12,796
Deferred:
Federal, including U.S. possession 206 2,817 (466)
State 10 396 (9)
216 3,213 (475)
$12,432 $ 14,576 $12,321
The reconciliation of the federal statutory rate to the Company's
effective rate is as follows:
Year Ended March 31,
1998 1997 1996
Federal statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting
from:
State tax, net of federal
tax benefit 2.3 2.0 1.7
Non-taxable interest and
dividends (0.8) (0.4) (0.3)
Research and development
credit (2.0) (1.3) (0.4)
Foreign Sales Corporation (1.2) (1.2) (1.2)
Foreign operations (0.2) (0.6) (1.7)
Non-deductible goodwill 0.5 0.4 0.5
Other 0.6 0.4 0.5
34.2% 34.3% 34.1%
Significant components of the Company's deferred tax liabilities
and assets are as follows:
Year Ended March 31,
(in thousands) 1998 1997 1996
Deferred tax liabilities:
Tax over book depreciation $1,254 $ 701 $ 1,355
Unrealized gain on
investment 2,800 _ _
4,054 701 1,355
Deferred tax assets:
Book liabilities not
deductible for tax 4,607 4,391 4,300
Inventory 907 914 744
Litigation settlement
obligation _ _ 2,423
Profit in inventory of
foreign subsidiaries 1,105 977 2,681
6,619 6,282 10,148
$ 2,565 $ 5,581 $ 8,793
Note H Supplemental Information
Supplemental schedule of cash flow
information: Year Ended March 31,
(in thousands) 1998 1997 1996
Interest paid $ 54 $ 1,549 $ 1,229
Income taxes paid $ 9,190 $10,013 $12,646
Note I Earnings per Share
In 1998 the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share". Statement 128 which
requires presentation of both Basic and Diluted earnings per
share. Prior year earnings per share amounts have been restated.
A reconciliation of weighted average shares outstanding, used to
calculate Basic earnings per share, to weighted average shares
outstanding assuming dilution, used to calculate Diluted earnings
per share, follows:
1998 1997 1996
Average outstanding shares: basic 24,894 24,863 24,163
Shares issueable through options 1,436 1,486 2,249
Average outstanding shares: diluted 26,330 26,349 26,412
Shares issueable through options are determined using the
treasury stock method.
Options to purchase 23,500, 21,500, and 33,500 shares with
exercise prices greater than the average market prices of common
stock were outstanding during the years ended March 31, 1998,
1997, and 1996, respectively. These options were excluded from
the respective computations of diluted earnings per share because
their effect would be anti-dilutive.
Note J 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
$2,778,306, $2,720,000 and $2,490,000 for fiscal 1998, 1997 and
1996, respectively.
Future minimum lease payments under lease arrangements at March
31, 1998 are as follows:
(in thousands)
1999 $2,640
2000 2,485
2001 2,262
2002 1,936
2003 1,797
Thereafter 26,363
Total $37,483
During fiscal 1998, the Company entered into an alliance with
Intracel Corporation, in which the Company will be the exclusive
distributor of a bladder cancer test manufactured by Intracel.
In addition, the Company has the right to distribute a potential
bladder cancer treatment product currently under development by
Intracel. The agreement with Intracel requires the Company to
pay $1 million per year, beginning in January 1998, for three
years, to defray the costs of the clinical trials for the cancer
treatment product. The Company must also pay an additional $3
million upon the completion of certain milestones related to the
clinical trials.
Note K Related Party Transactions
In 1991 the Company entered into an exclusive license agreement
with Rochester Medical Corporation (Rochester) to market and
distribute certain external catheter products developed by
Rochester. The Company purchased $2,400,000, $1,958,000 and
$525,000 of product from Rochester in 1998, 1997 and 1996,
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.
On March 3, 1998 the Board authorized the Company to loan three
Officers and Directors of the Company amounts totaling $844
thousand for the exercise of stock options and related taxes.
The loans are at current rates of interest and collateralized
with stock in the Company. At March 31, 1998 the $844 thousand
is included in other current assets. The loans were repaid
subsequent to year end.
Note L 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. These actions can be brought by an individual, or by
a group of patients purported to be a class action. 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 retention 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
($3,580,000 and $3,400,000 at March 31, 1998 and 1997,
respectively) in an amount it believes to be reasonably
sufficient to cover the cost of anticipated product liability
claims.
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 M Quarterly Financial Data (Unaudited)
The following is a summary of unaudited quarterly results of
operations. Prior year earnings per share amounts have been
restated. See Note I.
(in thousands, except per
share data) Quarter
Year Ended March 31, 1998 First Second Third Fourth
Net sales $ 55,291 $ 48,818 $ 54,076 $ 57,111
Gross profit 37,016 28,299 35,091 37,160
Net income 7,803 3,147 5,836 7,111
Basic earnings per share $ .31 $ .13 $ .23 $ .29
Diluted earnings per share: $ .30 $ .12 $ .22 $ .27
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
Basic earnings per share $ .29 $ .25 $ .29 $ .30
Diluted earnings per share: $ .27 $ .24 $ .27 $ .28
MENTOR CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
COL. A COL. B COL. C COL. D COL. E
Additions
Balance Charged
at to Costs Charged Balance at
Beginning and to Other End of
Description of PeriodExpenses Accounts Deductions Period
Year Ended March 31, 1998
Deducted from asset
accounts:
Allowance for
doubtful accounts $ 2,404 $ 1,353 $ - $ 959 $ 2,798
Liability Reserves:
Product liability $ 3,400 $ 2,385 $ - $ 2,205 $ 3,580
Accrued sales returns
and allowances 5,791 170 5,961
$ 9,191 $ 2,555 $ - $ 2,205 $ 9,541
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
EXHIBIT 21
LIST OF
SUBSIDIARIES OF MENTOR CORPORATION
1. Mentor Texas Inc. (Formerly Mentor H/S, Inc).
2. Mentor Minnesota Inc. (Formerly 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,(Aust) Pty. Ltd.
14. Mentor Medical Systems, Ltd.(UK)
15. Mentor Medical Systems, B.V.
16. Mentor Deutschland GmbH
17. Mentor Medical Systems, France, S.A.
18. Mentor Medical Systems,(Canada), Inc.
19. MDI Company LTD
20. Mentor Medical Systems, Iberica, S.L.
21. Havas Medical,
B.V.
22. Mentor Medical Inc.
23. Mentor Benelux B.V.
24. Mentor Japan K.K.
25. Mentor Medical Systems, C.V.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the (1)
Registration Statement Number 33-25865 on Form S-8
dated December 22, 1988 and (2) Registration Statement Number
33-48815 on Form S-8 dated June 24, 1992 of our report dated
May 5, 1998 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, 1998.
ERNST & YOUNG LLP
Los Angeles, California
June 26, 1998
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 26, 1998
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
26, 1998
Christopher J. Conway Executive Officer
and Director (Principal
Executive Officer)
/s/ANTHONY R. GETTE President and Secretary June
26, 1998
Anthony R. Gette and Director
/s/GARY E. MISTLIN Vice President of Finance/ June
26, 1998
Gary E. Mistlin Treasurer
(Principal Financial and
Accounting Officer)
/s/WALTER W. FASTER Director June
26, 1998
Walter W. Faster
/s/EUGENE G. GLOVER Director June
26, 1998
Eugene G. Glover
/s/MICHAEL NAKONECHNY Director June
26, 1998
Michael Nakonechny
/s/BYRON G. SHAFFER Director June
26, 1998
Byron G. Shaffer
/s/DR. RICHARD W. YOUNG Director June
26, 1998
Dr. Richard W. Young
EXHIBIT 10(o)
EMPLOYMENT AGREEMENT
This Employment Agreement, dated October 30, 1997, is
between MENTOR Corporation ("COMPANY"), with its executive
offices at 5425 Hollister Avenue, Santa Barbara, California 93111
and MALCOLM BODDY ("EMPLOYEE") of 29 Upper Ritie Street,
Piermont, New York, 10968.
RECITALS
COMPANY is in the business of manufacturing and selling
medical devices and related products. EMPLOYEE has experience in
this business and possesses valuable skills and experience, and
unique, personal knowledge about the operations of this business.
EMPLOYEE is willing to be engaged by COMPANY and COMPANY is
willing to engage EMPLOYEE in an executive capacity responsible
for the manufactuiring operations of the COMPANY, upon the terms
and conditions set forth in this Agreement.
AGREEMENT
EMPLOYEE and COMPANY, intending to be legally bound, agree as
follows:
1. SERVICES
1.1. General Services.
1.1.1 Company shall employ EMPLOYEE as Senior Vice
President, Manufacturing Operations. EMPLOYEE shall perform the
duties customarily performed by one holding such position in a
similar business as that engaged in by COMPANY and shall also
render such other, different and/or new services and duties as
may be assigned to EMPLOYEE by COMPANY from time to time
hereinafter referred to as "Services"). EMPLOYEE shall report
directly to the President and Chief Operating Officer of Mentor
Corporation. EMPLOYEE shall serve at the pleasure of COMPANY's
Board of Directors.
1.1.2 As Senior Vice President, Manufacturing
Operations of COMPANY, EMPLOYEE shall also be an officer of
COMPANY. In such capacity, EMPLOYEE shall serve at the pleasure
of COMPANY's Board of Directors. EMPLOYEE shall serve in this
further capacity without further compensation.
1.1.3 EMPLOYEE shall devote his entire productive
business time, ability nd attention to the business of COMPANY
during the term of this Agreement. EMPLOYEE shall not directly
or indirectly render any services of a business, commercial, or
professional nature to any other person or organization, whether
for compensation or otherwise, without the prior written consent
of the Board of Directors of COMPANY. The foregoing is not
intended to restrict EMPLOYEE's ability to enter into passive
investments which do not compete in any way with COMPANY's
business.
1.1.4 EMPLOYEE hereby represents that the services to
be performed by EMPLOYEE pursuant to this Agreement are of a
special, unique, unusual, extraordinary, and intellectual
character which gives them a peculiar value, the loss of which
cannot be reasonably or adequately compensated in damages in an
action at law. EMPLOYEE therefore expressly agrees that COMPANY,
in addition to any other rights or remedies which it may possess,
shall be entitled to injunction and other equitable relief to
prevent a breach of this Agreement by EMPLOYEE.
1.2 Best Efforts. EMPLOYEE shall serve COMPANY faithfully
and to the best of EMPLOYEE's ability. EMPLOYEE shall use
EMPLOYEE's best efforts to perform the Services. Employee shall
act at all times according to what EMPLOYEE reasonably believes
is in the best interests of COMPANY.
1.3 Corporate Authority. Employee, as an executive
officer, shall comply with all laws and regulations applicable to
EMPLOYEE as a result of this Agreement including, but not limited
to, the Securities Act of 1933 and Securities Act of 1934.
Prior to the execution of this Agreement, EMPLOYEE has
received and reviewed COMPANY's Policies and Procedures and
COMPANY's Employee Handbook. EMPLOYEE shall comply with
COMPANY's Policies and Procedures, and practices now in effect or
as later amended or adopted by COMPANY.
2. TERM
This Agreement shall commence upon the execution of this
Agreement and continue until terminated as provided in Section 4
of this Agreement. EMPLOYEE's commencement date shall be on or
before October 30, 1997.
3. COMPENSATION AND BENEFITS
3.1 Compensation. EMPLOYEE's total compensation consists
of base salary, bonus potential, stock options, and medical and
other benefits generally provided to employees of COMPANY. Any
compensation paid to EMPLOYEE shall be pursuant to COMPANY's
policies and practices for exempt employees and shall be subject
to all applicable taxes with deductions made as required by state
and federal laws. Compensation provided in this Agreement is
full payment for Services and EMPLOYEE shall receive no
additional compensation for extraordinary services unless
otherwise authorized.
3.1.1 For the first nine months of this Agreement,
COMPANY agrees to pay EMPLOYEE a base salary of Two Hundred
Thousand Dollars ($200,000.00).
3.1.2 Employee shall also be entitled to a bonus
with potential of up to forty percent (40%) of base salary
calculated on a fiscal year basis (Fiscal Year Ending March 31,
1998) provided mutually designated objectives are attained and
subject to approval by COMPANY's Compensation Committee and Board
of Directors.
3.1.3 At the next regularly scheduled meeting of
the Board of Directors of COMPANY, EMPLOYEE shall be granted an
option for Twenty Five Thousand (25,000) shares of COMPANY's
common stock subject to a four (4) year vesting schedule one (1)
year after grant and expiring ten (10) years thereafter and
otherwise in accordance with the Mentor Corporation 1991 Stock
Option Plan ("Plan"), and as amended form time to time. EMPLOYEE
shall execute the Option Agreement and otherwise comply with the
terms of the Plan with regard to the options being granted by
this Agreement.
3.1.4 Thereafter, EMPLOYEE's compensation shall be
fixed annually by the Compensation Committee of COMPANY's Board
of Directors.
3.1.5 In the event of a change in control in the
ownership of the company, defined as more than Twenty Five
Percent (25%) of the presently outstanding common stock of the
Company becoming owned by a single entity, and on the further
condition that you are not yet a US. Citizen, then the Company,
and/or its' successors and assigns will cause you to be
reimbursed for relocation expenses actually incurred in the
return of you and your family, and your personal possessions, to
the U.K. This reimbursement shall be limited to Thirty Five
Thousand Dollars and No Cents ($35,000.00).
3.1.6 Company agrees to sponsor Employee's
attainment of green card status.
3.2 Business Expenses. COMPANY shall reimburse EMPLOYEE
for business expenses reasonably incurred in performing Services
according to COMPANY's Expense Reimbursement Policy.
3.3 Relocation Expenses. COMPANY shall reimburse EMPLOYEE
for relocation expenses, whether or not deductible pursuant to
state of federal income tax laws. Relocation expenses shall be
limited to reasonable expenses for real estate commissions
incurred upon the sale of EMPLOYEE's primary residence, house-
hunting trips, physical moving expenses, (once upon movement into
temporary housing and once upon movement into permanent housing),
closing costs and fees not to exceed One and one- half (1.5)
mortgage points, temporary living expenses of up to Thirty five
hundred ($3,500.00) per month in the Santa Barbara area for up to
three (3) months, and other reasonable out of pocket expenses
(other than home decorating expenses, differences in mortgage
rates, costs of comparable housing, etc.). COMPANY will
reimburse EMPLOYEE for state and federal income taxes EMPLOYEE
would not otherwise have incurred attributable to the receipt of
Relocation Expenses as provided in this Section 3.3 (generally
referred to as reimbursement on a "gross-up" basis).
3.4 Additional Benefits. COMPANY shall provide EMPLOYEE
those additional benefits normally granted by COMPANY to its
employees subject to eligibility requirements applicable to each
benefit. Company has no obligation to provide any other benefits
unless provided for in this Agreement. Currently COMPANY
provides major medical, dental, and vision benefits and
eligibility to participate in the COMPANY's 401(k) plan.
3.5 Vacation. Employee will accrue vacation equal to
fifteen (15) days per year during the first five (5) years of
service. Thereafter, vacation shall accrue at twenty (20) days
per year. The time or times for such vacation shall be selected
by Employee and approved by the Chairman of the Board of
Directors of COMPANY.
3.6 Automobile Expense. COMPANY will permit EMPLOYEE to
select a business automobile (e.g., four-door sedan) for lease by
the COMPANY with lease payments not to exceed Seven Hundred
Dollars ($700.00) per month.
4. TERMINATION
4.1 Termination. This Agreement and the employment
relationship between COMPANY and EMPLOYEE may be terminated as
follows:
4.1.1 This Agreement shall terminate upon EMPLOYEE's
death.
4.1.2 Company may, at its option, either suspend
compensation payments or terminate this Agreement if EMPLOYEE is
Disabled. If COMPANY suspends compensation payments, COMPANY
shall resume compensation payments when EMPLOYEE resumes
performance of the Services. If COMPANY elects to terminate this
Agreement, it must first give EMPLOYEE three (3) days advance
written notice. (For the purpose of this Agreement, "Disabled"
means that EMPLOYEE is incapable of performing the Services
because of accident, injury, or physical or mental illness for
thirty (30) consecutive days, or is unable or shall have failed
to perform the Services for a total period of sixty (60) days,
regardless of whether such days are consecutive).
4.1.3 If COMPANY discontinues operating its business,
this Agreement shall terminate as of the last day of the month on
which COMPANY ceases its operations with the same effect as if
that last date were originally established as termination date of
this Agreement.
4.1.4 COMPANY may terminate this Agreement without
advance notice for Cause. For the purpose of this Agreement,
"Cause" shall mean any failure to comply in any material respect
with this Agreement; personal or professional misconduct by
EMPLOYEE (including, but not limited to, criminal activity or
gross or willful neglect of duty); breach of EMPLOYEE's fiduciary
duty to gross or willful neglect of duty); breach of EMPLOYEE's
fiduciary duty to COMPANY as an officer of both, conduct which
threatens public health or safety, or threatens to do immediate
or substantial harm to COMPANY's business or reputation; or any
other misconduct, deficiency, failure of performance, breach or
default, reasonably capable of being remedied or corrected by
EMPLOYEE, which EMPLOYEE fails to correct after having been given
thirty (30) days written notice thereof. COMPANY's exercise of
its right toterminate under this section shall be without
prejudice to any other remedy that COMPANY may be entitled to at
law, in equity, or under this Agreement.
4.1.5 This Agreement and employment relationship is
terminable by either party, with or without cause, at any time by
giving the other party thirty (30) days advance written notice.
Nothing in this Agreement or any other document provided by
COMPANY is intended to be, nor should it be, construed as a
guarantee that employment or any benefit will be continued for
any period of time. All employees of COMPANY are employees at
will and, as such, are free to resign at any time. COMPANY,
likewise, retains the right to terminate the employment of any
employee, including EMPLOYEE, with or without cause.
4.2 EMPLOYEE's Rights Upon Termination
4.2.1 Upon death or Disability of EMPLOYEE, COMPANY
shall have no further obligation to EMPLOYEE under the Agreement
except to distribute to EMPLOYEE's estate or designated
beneficiary any unpaid compensation and reimbursable expenses
earned by EMPLOYEE prior to EMPLOYEE's death or date of
termination.
4.2.2 Upon termination of EMPLOYEE's employment by
COMPANY without cause pursuant to Section 4.1.5, COMPANY shall
have no further obligation to EMPLOYEE under this Agreement
except to distribute to EMPLOYEE:
i. Any compensation and reimbursable expenses
owed by COMPANY through the termination date, and
ii. Severance compensation totaling three (3)
months base pay plus one (1) month base pay for each complete
year of EMPLOYEE's service with COMPANY, determined at EMPLOYEE's
then current rate of base pay. No Severance compensation shall
be owing pursuant to this paragraph unless Employee concurrently
executes standard form release of all claims against COMPANY.
Severance compensation pursuant to this paragraph shall be in
lieu of any other severance benefit to which EMPLOYEE would
otherwise be entitled under COMPANY's policies in effect on the
date of execution of this Agreement. Severance compensation
shall be paid upon termination of EMPLOYEE's employment and in
one lump sum payment at the date of termination.
4.2.3 Upon termination of EMPLOYEE's employment for
Cause pursuant to Section 4.1.4, COMPANY shall have no further
obligation to EMPLOYEE under this Agreement except to distribute
to EMPLOYEE:
i. Any compensation and reimbursable expenses
owed by COMPANY through the termination date; and
ii. Severance compensation as provided for in the
COMPANY's Severance Policy, if any.
5. COVENANTS
5.1 Nondisclosure and Invention Assignment. EMPLOYEE
acknowledges that, as a result of performing the Services,
EMPLOYEE shall have access to confidential and sensitive
information concerning COMPANY's business including, but not
limited to, their business operations, sales and marketing data,
and manufacturing processes. EMPLOYEE also acknowledges that in
the course of performing the Services, EMPLOYEE may develop new
product ideas or inventions as a result of COMPANY's information.
Accordingly, to preserve COMPANY's confidential information and
to assure it the full benefit of that information, EMPLOYEE shall
simultaneously execute the COMPANY's standard form of Employee
Confidentiality Agreement attached hereto as Exhibit A. The
Employee Confidentiality Agreement is incorporated herein by this
reference.
5.2 Covenant Not to Compete. Employee shall abide by the
following covenant not to compete if COMPANY, at its option upon
the termination of this Agreement, exercises this Covenant Not to
Compete. COMPANY shall notify EMPLOYEE within ten (10) days of
the termination of this Agreement of its intention to exercise
this option an make an additional payment to EMPLOYEE of six (6)
months base pay determined at EMPLOYEE's then current rate of
pay. EMPLOYEE agrees that for a period of two (2) years
following the termination of this Agreement, he shall not
directly or indirectly for EMPLOYEE, or as a member of a
partnership, or as an officer, director, stockholder, employee,
or representative of any company, engage, directly or indirectly,
in any business activity which is the same or similar to work
engaged in by EMPLOYEE as EMPLOYEE of COMPANY within the same
geographic territory as EMPLOYEE's work for COMPANY and which is
directly competitive with the business conducted or to EMPLOYEE's
knowledge, contemplated by COMPANY at the time of termination of
this Agreement.
6. ASSIGNMENT
Neither party may assign or otherwise dispose of its rights or
obligations under this Agreement without the prior written
consent of the other party except as provided in this section.
COMPANY may assign and transfer its interest in this Agreement to
its successor in interest who assumes COMPANY's obligations under
this Agreement and in the event of a merger or consolidation of
COMPANY with any other corporation, the sale by COMPANY of a
major portion of its assets or its business and goodwill, or any
other corporate reorganization involving COMPANY.
7. RESOLUTION OF DISPUTES
7.1 Arbitration. Any dispute arising out of or in
connection with this Agreement or in any way relating to the
employment of EMPLOYEE by COMPANY shall be arbitrated according
to the American Arbitration Association's rules, excepting that
(i) the arbitrator/s shall furnish the parties with a written
decision setting forth findings of fact, conclusions of law, and
order; and (ii) the arbitration panel shall be composed of
persons who are knowledgeable in such matters if the issue in
dispute involves matters of patents, licensing, or technology.
7.2 Specifically Enforceable. This agreement to arbitrate
shall be specifically enforceable, and any award or order
rendered in any proceeding under this section shall be final and
specifically enforced by any court of competent jurisdiction. In
addition to any monetary award that may be given, the arbitrators
may order a party to perform any act required by this Agreement
or to refrain form performing any act contrary to this Agreement.
7.3 Venue. The venue for any such proceeding shall be
Santa Barbara County, California.
7.4. Costs and Fees. Each party shall initially bear its
own costs and expenses in any arbitration proceeding; however,
costs and reasonable attorneys' fees shall be awarded to the
prevailing party and by the losing party.
8. GENERAL PROVISIONS
8.1 Notices. Notice under this Agreement shall be
sufficient only if personally delivered by a major commercial
paid delivery courier service or mailed by certified or
registered mail (return receipt requested) to the other party at
its address set forth in the signature block below. If not
received sooner, notices by mail shall be deemed received five
(5) days after deposit in the United States mail.
8.2 Entire Agreement. With respect to its subject matter,
namely, the employment by COMPANY of EMPLOYEE, this Agreement
contains the entire understanding between the parties, and
supersedes any prior agreements, understandings, and
communications between the parties, including, but not limited
to, the offer of employment dated August 4, 1994.
8.3 Agreement Controls. Unless otherwise provided for in
this Agreement, the COMPANY's policies, procedures and practices
shall govern the relationship between EMPLOYEE and COMPANY. If
any of COMPANY's policies, procedures and practices conflict with
this Agreement, this Agreement shall control.
8.4 Binding Effect. This Agreement shall inure to the
benefit of and be binding upon the parties, and their respective
legal representatives, successors, and assigns.
8.5 Amendment and Waiver. Any provision of this Agreement
may be amended or modified and the observance of any provision
may be waived (either retroactively or prospectively) only by
written consent of the parties. Either party's failure to
enforce any provisions of this Agreement shall not be construed
as a waiver of that party's right to enforce such provisions.
8.6 Governing Law. This Agreement shall be interpreted
under the laws of the State of California.
8.7 Force Majeure. Either party shall be temporarily
excused form performing under this Agreement if any force majeure
or other occurrence beyond the reasonable control of either party
makes such performance impossible, except a Disability as defined
in this Agreement. Under such circumstances, performance under
this Agreement which related to the delay shall be suspended for
the duration of the delay provided the delayed party shall resume
performance of its obligations with due diligence once the
delaying event subsides. In case of any such suspension, the
parties shall use their best efforts to overcome the cause and
effect of such suspension.
8.9 Attorneys' Fees. In any action under this Agreement,
the prevailing party shall be entitled to reasonable attorneys'
fees and costs to be paid by the losing party.
8.10 Remedies. Employee acknowledges that because of the
nature of COMPANY's business and the subject matter of this
Agreement, a breach of this Agreement shall cause substantial
injury to COMPANY for which money damages shall not provide an
adequate remedy. EMPLOYEE agrees that COMPANY shall have the
right to obtain injunctive relief, including the right to have
the provisions of this Agreement specifically enforced by any
court having equity jurisdiction, in addition to any other
remedies that COMPANY may have.
8.11 Severability. If any provision for this Agreement is
held to be invalid, illegal, or unenforceable by any court of
competent jurisdiction, that provision shall be limited or
eliminated to the minimum extent necessary so this Agreement
shall otherwise remain enforceable in full force and effect.
8.12 Construction. Headings and captions are only for
convenience and are not to be used in the interpretation of this
Agreement. Whenever the context requires, words, used in the
singular shall be construed to include the plural and vice versa,
and pronouns of any gender shall be deemed to include the
masculine, feminine, or neuter gender.
8.13 Counterpart Copies. This Agreement shall be signed in
counterpart copies, each of which shall represent an original
document, and all of which shall constitute a single document.
The parties execute this Agreement as of the date stated above.
MALCOLM BODDY MENTOR Corporation
/s/MALCOLM BODDY /s/ ANTHONY R. GETTE
Anthony R. Gette
President and Chief Operating
Officer