-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LVSqLPjbvTj19Dxr5gk8qXpd+LBKmRpdJ2u/1nO1bc6HJz5guail85aNsdVVzTv9 IIcCOYDqjcs+K8VwmFWo/w== /in/edgar/work/0000064892-00-000023/0000064892-00-000023.txt : 20001114 0000064892-00-000023.hdr.sgml : 20001114 ACCESSION NUMBER: 0000064892-00-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MENTOR CORP /MN/ CENTRAL INDEX KEY: 0000064892 STANDARD INDUSTRIAL CLASSIFICATION: [3842 ] IRS NUMBER: 410950791 STATE OF INCORPORATION: MN FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-07955 FILM NUMBER: 759716 BUSINESS ADDRESS: STREET 1: 201 MENTOR DR CITY: SANTA BARBARA STATE: CA ZIP: 93111 BUSINESS PHONE: 8058796000 MAIL ADDRESS: STREET 1: 201 MENTOR DR CITY: SANTA BARBARA STATE: CA ZIP: 93111 10-Q 1 0001.txt SECURITIES AND EXCHANGE COMMISSION Washington D.C. FORM 10-Q Quarterly Report Under Section 13 or 15(d) Of the Securities Exchange Act of 1934 For the Quarterly Period September 30, 2000 Commission File Number 0-7955 Mentor Corporation (Exact name of registrant as specified in its charter) Minnesota 41-0950791 (State of Incorporation) (I.R.S. Employer Identification Number) 201 Mentor Drive, Santa Barbara, California 93111 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number: (805) 879-6000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months or for such shorter period that the registrant was required to file such reports and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding for each of the Issuer's classes of common stock as of November 10, 2000 was: Common stock, $.10 par value 23,279,806 shares Mentor Corporation INDEX Part I. Financial Information Item 1. Financial Statements (unaudited) Condensed Consolidated Statements of Financial Position -- September 30, 2000 and March 31, 2000 Consolidated Statements of Income - Three Months Ended September 30, 2000 and 1999 Consolidated Statements of Income - Six Months Ended September 30, 2000 and 1999 Condensed Consolidated Statements of Cash Flows -- Six Months Ended September 30, 2000 and 1999 Notes to Condensed Consolidated Financial Statements-- September 30, 2000 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Item 3. Quantitative and Qualitative Disclosures About Market Risk Part II. Other Information Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K List of Exhibits 27 Financial Data Schedule Mentor Corporation Condensed Consolidated Statements of Financial Position September 30, 2000 and March 31, 2000 (Unaudited) Sept 30, March 31, (dollars in thousands) 2000 2000 ASSETS Current assets: Cash and cash equivalents $ 16,006 $ 24,313 Marketable securities 46,327 52,563 Accounts receivable, net 37,890 45,310 Inventories 37,383 34,441 Deferred income taxes 7,552 5,739 Prepaid expenses and other 6,975 6,096 Total current assets 152,133 168,462 Property and equipment, net 34,267 36,522 Intangibles, net 13,721 4,008 Goodwill, net 4,597 4,394 Long-term marketable securities and investments 10,216 12,848 Other assets 4,323 4,472 67,124 62,244 Total assets $ 219,257 $ 230,706 See Notes to Condensed Consolidated Financial Statements Mentor Corporation Condensed Consolidated Statements of Financial Position September 30, 2000 and March 31, 2000 (Unaudited) Sept 30, March 31, (dollars in thousands) 2000 2000 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,699 $ 10,342 Accrued compensation 6,318 8,972 Income taxes payable 910 3,868 Dividends payable 594 608 Sales returns 5,809 6,401 Warranty and related reserves 8,542 6,563 Accrued royalties 1,055 1,600 Other accrued liabilities 7,265 5,967 Total current liabilities 37,192 44,321 Deferred income taxes 3,194 2,743 Shareholders' equity: Common stock, $.10 par value: Authorized 50,000,000 shares Issued and outstanding: shares at 23,449,708 September 30, 2000 24,208,834 shares at March 31, 2000 2,345 2,421 Capital in excess of par value - 9,876 Foreign currency translation Adjustments (3,918) (2,694) Net unrealized gains on securities 3,417 5,017 Retained earnings 177,027 169,022 178,871 183,642 Total liabilities and shareholders' Equity $ 219,257 $ 230,706 See Notes to Condensed Consolidated Financial Statements Mentor Corporation Consolidated Statements of Income Three Months Ended September 30, 2000 and 1999 (Unaudited) (in thousands, except per share data) 2000 1999 Net sales $ 60,349 $ 58,002 Costs and expenses: Cost of sales 23,257 21,910 Selling, general and administrative, exclusive of 23,886 23,894 restructuring charge Research and development 4,914 3,908 Restructuring charge 1,050 - 53,107 49,712 Operating income 7,242 8,290 Interest expense (21) (10) Interest income 1,109 807 Other income, net 657 (235) Income from continuing operations before income taxes 8,987 8,852 Income taxes 2,964 2,839 Income from continuing operations 6,023 6,013 Income from discontinued operations, net of income taxes - 289 Net income $ 6,023 $ 6,302 Basic earnings per share: Continuing operations $ .25 $ .25 Discontinued operations - .01 Basic earnings per share $ .25 $ .26 Diluted earnings per share: Continuing operations $ .25 $ .24 Discontinued operations - .01 Diluted earnings per share $ .25 $ .25 See notes to consolidated financial statements Mentor Corporation Consolidated Statements of Income Six Months Ended September 30, 2000 and 1999 (Unaudited) (in thousands, except per share data) 2000 1999 Net sales $ 127,134 $ 118,146 Costs and expenses: Cost of sales 48,208 43,430 Selling, general and administrative, exclusive of 50,326 48,425 restructuring charge Research and development 9,186 8,034 Restructuring charge 1,050 - 108,770 99,889 Operating income 18,364 18,257 Interest expense (86) (29) Interest income 2,238 982 Other income, net 833 (163) Income from continuing operations before income taxes 21,349 19,047 Income taxes 6,993 6,059 Income from continuing operations 14,356 12,988 Income from discontinued operations, net of income taxes - 7,226 Net income $ 14,356 $ 20,214 Basic earnings per share: Continuing operations $ .60 $ .53 Discontinued operations - .30 Basic earnings per share $ .60 $ .83 Diluted earnings per share: Continuing operations $ .59 $ .52 Discontinued operations - .29 Diluted earnings per share $ .59 $ .81 See notes to consolidated financial statements Mentor Corporation Condensed Consolidated Statements of Cash Flows Six Months Ended September 30, 2000 and 1999 (Unaudited) (in thousands) 2000 1999 Net cash provided by continuing operating activities $ 12,544 $ 13,511 Net cash provided by discontinued operating activities - (1,163) Net cash provided by operating activities 12,544 12,348 Cash from Investing Activities: Purchases of property, equipment, and intangibles (3,060) (6,012) Purchases and sales of marketable securities, net 7,500 (12,383) Other, net 149 (21) Net cash provided by (used for) continuing investing activities 4,589 (18,416) Net cash provided by discontinued Investing activities - 38,377 Net cash provided by Investing activities 4,589 19,961 Cash from Financing Activities: Proceeds from exercise of stock Options 937 3,253 Dividends paid (1,203) (1,223) Borrowings under line of credit Agreement 6,000 - Repayments under line of credit Agreement (6,000) (4,000) Repurchase of common stock (25,174) (5,686) Net cash used for financing activities (25,440) (7,656) Increase (decrease) in cash and cash Equivalents (8,307) 24,653 Cash and cash equivalents at beginning of period 24,313 19,533 Cash and cash equivalents at end of Period $ 16,006 $ 44,186 See notes to consolidated financial statements Mentor Corporation Notes to Condensed Consolidated Financial Statements September 30, 2000 Note A - Summary of Significant Accounting Policies The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S- X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and six-month periods ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year ended March 31, 2001. The balance sheet at March 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended March 31, 2000. Note B - Inventories Inventories at September 30, 2000 and March 31, 2000 consisted of: (in thousands) Sept 30, March 31, Raw materials $ 6,169 $ 5,880 Work in process 6,358 7,068 Finished goods 24,856 21,493 $ 37,383 $ 34,441 Note C - Long-Term Marketable Securities The Company's long-term marketable securities and investments include the Company's equity investments in its manufacturing partners, Intracel Corporation and North American Scientific, Inc. (NASI) and shares of Paradigm Medical Industries, Inc. (Paradigm) received in connection with the sale of assets of discontinued operations. Intracel Corporation is developing a new potential treatment for bladder cancer. The Intracel Corporation investment is carried at $3 million adjusted cost as quoted market prices are not available. Also included is a equity interest in NASI, the Company's manufacturing partner under an exclusive agreement for the distribution of brachytherapy seeds for the treatment of prostate cancer, and an equity interest in Paradigm. These investments are recorded at fair market value of $7,216,000, (cost of $1,956,000) and $9,840,000 (cost of $2,122,000) based upon quoted stock market prices at September 30, 2000 and March 31, 2000, respectively. The unrealized gain of $3,417,000 and $5,017,000, net of taxes of $1,843,000 and $2,701,000, at September 30, and March 31, 2000, respectively, is reported as a separate component of shareholders' equity. The Company has sold a portion of its NASI securities and realized a gain of $641,000 for the quarter ended September 30, and $1,098,000 for the six months ended September 30, 2000. The gain was reflected in other income, net. Note D - Comprehensive Income The components of comprehensive income are listed below: Three Months Ended Six Months Ended September 30, September 30, (in thousands) 2000 1999 2000 1999 Net income $ 6,023 $ 6,302 $14,356 $ 20,214 Foreign currency translation adjustment (728) (489) (1,224) (239) Unrealized gains (losses) on investment activities 514 (135) (1,600) 534 Comprehensive income $ 5,809 $ 6,656 $11,532 $ 20,509 Note E - Business Segment Information The Company's operations are principally managed on a functional basis and reported on a product or geographic basis. As a result there are four reportable segments: Aesthetic and General Surgery, Surgical Urology, Clinical and Consumer Healthcare products, and International. The Aesthetic and General Surgery products segment consists primarily of breast implants, tissue expanders and the Company's Contour Genesis Ultrasonic equipment product line along with equipment and disposables for traditional liposuction. The Surgical Urology segment includes penile implants, surgical incontinence products and brachytherapy seeds for the treatment of prostate cancer. The Clinical and Consumer Healthcare segment includes catheters and other products for the management of urinary incontinence and retention. The International segment includes the operations of the Company's wholly owned international sales offices, which cover most of the Company's implantable product lines, and a small European manufacturing and distribution facility. Segment revenues include domestic sales, sales to independent foreign distributors and sales to the Company's direct international sales offices. Selected financial information for the Company's reportable segments for the quarter ended September 30, 2000 and 1999 follows: Three Months Ended Six Months Ended September 30, September 30, (in thousands) 2000 1999 2000 1999 Revenues Aesthetic and General Surgery $ 30,747 $ 28,663 $ 66,649 $ 62,816 Surgical Urology 13,369 12,533 27,021 23,006 Clinical and Consumer Healthcare 11,120 12,190 22,876 21,993 International 9,450 8,901 20,881 19,751 Total reportable segments 64,686 62,287 137,427 127,566 Elimination of inter- segment revenues (4,337) (4,285) (10,293) (9,420) Total consolidated revenues $ 60,349 $ 58,002 $127,134 $118,146 Three Months Ended Six Months Ended September 30, September 30, (in thousands) 2000 1999 2000 1999 Operating profit (loss) from continuing operations Aesthetic and General Surgery $ 6,553 $ 6,145 $ 15,446 $ 17,473 Surgical Urology 1,941 1,964 3,492 2,563 Clinical and Consumer Healthcare 1,672 2,623 3,770 3,827 International 1,094 1,502 3,252 3,449 Total reportable segments 11,260 12,234 25,960 27,312 Corporate operating loss (4,018) (3,944) (7,596) (9,055) Interest expense (21) (10) (86) (29) Interest income 1,109 807 2,238 982 Other income 657 (235) 833 (163) Income from continuing operations before taxes $ 8,987 $ 8,852 $ 21,349 $ 19,047 September 30, March 31, (in thousands) 2000 2000 Identifiable assets Aesthetic and General Surgery $ 61,060 $ 56,583 Surgical Urology 24,442 23,429 Clinical and Consumer Healthcare 22,760 26,714 International 25,094 24,627 Total reportable segments 133,356 131,353 Corporate and other 85,901 99,353 Consolidated assets $ 219,257 $ 230,706 Note F - Discontinued Operations In May 1999, the Company announced that its Board of Directors had decided to divest the ophthalmology business, which accounted for approximately 16% of sales in fiscal 1999. Consistent with the plan to dispose of its ophthalmic business segment, the net assets and operations of the ophthalmic segment of the business, comprised of the intraocular lens products and ophthalmic equipment lines, have been classified as discontinued operations. A summary of the results of operations for discontinued operations for the three-month and six-month periods ended September 30, 1999 follows: Three Months Six Months Ended Ended September 30, September 30, (in thousands) 1999 1999 Revenues $ 4,883 $ 13,962 Income before income taxes 536 1,102 Income tax expense 247 1,350 Net (loss) from discontinued operations 289 (248) Gain from disposal, net of taxes of $3,826 - 7,474 Net income from discontinued operations $ 289 $ 7,226 During the quarter ended June 30, 1999, the Company completed the sale of the assets of the intraocular lens business, for cash consideration of $38.4 million. As disclosed in the Company's annual report on Form 10-K for March 31, 2000, the remaining assets related to the ophthalmic business segment were disposed of in the quarter ending December 31, 1999. At September 30, 2000 and March 31, 2000, remaining assets and liabilities related to discontinued operations were not significant. Note G - Earnings per Share A reconciliation of weighted average shares outstanding, used to calculate basic earnings per share, to weighted average shares outstanding assuming dilution, used to calculate diluted earnings per share, follows: Three Months Ended Six Months Ended September 30, September 30, 2000 1999 2000 1999 Average outstanding shares: Basic 23,646 24,414 23,790 24,468 Shares issuable through options 576 753 618 639 Average common shares outstanding: Diluted 24,222 25,167 24,408 25,107 Shares issuable through options are determined using the treasury stock method. Note H - Interim Reporting The Company's three quarterly interim reporting periods are each approximately thirteen-week periods ending on the Friday nearest the end of the third calendar month. The fiscal year end remains March 31. To facilitate ease of presentation, each interim period is shown as if it ended on the last day of the appropriate calendar month. The actual dates for each quarter end are shown below: Fiscal 2001 Fiscal 2000 First Quarter June 30, 2000 July 2, 1999 Second Quarter September 29, 2000 October 1, 1999 Third Quarter December 29, 2000 December 31, 1999 Note I - Effects of Recent Accounting Pronouncements In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" or SAB 101. SAB 101 summarizes certain of the SEC Staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company is currently evaluating the potential impact, if any, that this SAB will have on its revenue recognition policies. However, based on preliminary evaluations, the Company does not believe that this SAB will result in any material change to its revenue recognition policies. SAB 101 will become effective for the fourth quarter ending March 31, 2001. Note J - Acquisition of Intangible assets Certain technologies related to the manufacture of mammary prostheses were developed under a 1983 agreement with a limited partnership whereby the limited partners contributed money towards the development of the technology in exchange for payments based upon a percentage of future sales of the products utilizing the technology. During the first quarter ended June 30, 2000 the Company exercised its option under the Agreement of Purchase and Sale between Mentor Corporation and the Partnership, as amended, to make a lump sum payment to the Limited Partners in lieu of all future payments and rights. The Limited Partners could elect to be paid in cash, Company's common stock, or a combination. This transaction was completed in the second quarter ended September 30, 2000. The limited partners elected to be paid $1.0 million in cash and 434 thousand shares of the Company's common stock which were issued under rule 144 and transfer is restricted. The shares were valued at the fair market value on the date of issuance, of approximately $9 million. Accordingly the purchased partnership rights were recorded as $10.1 million, cost, as an intangible asset and will be amortized over their estimated economic life. Note K -Restructuring charge In September 2000, Mentor initiated a restructuring plan as part of a strategic initiative to streamline operations and improve the efficiency of the Company. Early in October, staff reductions at the Corporate headquarters were announced and costs were estimated to total $1.8 million. The plan was later expanded to include employee reductions at the two manufacturing plants. The total plan includes a reduction in workforce of approximately 70 employees and changes in internal organization structure. Employees effected by the restructuring will be provided with a severance package, outplacement counseling and extended benefits totaling approximately $2.4 million. The Company recorded $1.050 million of the restructuring charge in the quarter ended September 30, 2000 and expects to record the remainder in the quarter ending December 31, 2000. Approximately $1.9 million of the total amount was paid early in the third quarter. Mentor Corporation Management's Discussion and Analysis of Results of Operations and Financial Condition Except for the historical information contained herein, the matters discussed in this Management's Discussion contain certain forward-looking statements that involve risk and uncertainty. Such forward-looking statements are characterized by future or conditional verbs and include statements regarding new and existing products, technologies and opportunities, market and industry segment growth and demand and acceptance of new and existing products. Such statements are only predictions and our actual results may differ materially from those anticipated in these forward-looking statements. Factors that may cause such differences include, but are not limited to, increased competition, changes in product demand, changes in market acceptance, new product development, obtaining FDA approval of new and existing products, changes in government regulation, supply of raw materials, changes in reimbursement practices, adverse results of litigation and other risks identified in this Form 10-Q or in other documents filed by the Company with the Securities and Exchange Commission. Specific attention should be directed to the sections entitled "Government Regulation", "Product Liability", and "Factors that May Effect Future Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2000. The Company assumes no obligation to update forward-looking statements as circumstances change. In May 1999, the Company announced that its Board of Directors decided to divest the ophthalmology business, which accounted for approximately 16% of sales in fiscal 1999. The Company completed the sale of the assets of the intraocular lens portion of the ophthalmology business in the quarter ended June 30, 1999. In the quarter ended December 31, 1999, the Company completed the sale of the remaining assets of the Ophthalmology business, primarily the equipment product lines. Accordingly, the Company accounts for the ophthalmic business as a "Discontinued Operations" in accordance with Generally Accepted Accounting Principles. Accordingly, results of operations of the ophthalmic business are reported, on a net basis, as a single line on the financials. All prior period amounts in this Form 10-Q have been presented to exclude operating the results of the ophthalmic business as discontinued operations. RESULTS OF OPERATIONS Sales Sales for the three months ended September 30, 2000 increased 4% to $60 million, compared to $58 million for the prior year. Strong sales in key growth products were offset by weaknesses in other product lines. World-wide, our breast implant sales increased by 11% over the same quarter last year. At the same time, sales of body contouring (liposuction) products declined by 13% for the quarter, resulting in overall sales of $35.4 million for aesthetic and general surgery products, an increase of 9% over second quarter last year. Sales of surgical urology products totaled $13.6 million for the quarter, up 6% over last year. Sales of our Suspend sling implant for incontinence increased by over 40%, brachytherapy product sales grew by 6%, and penile implant sales were unchanged from a year ago. The clinical and consumer healthcare product line, consisting of urological catheters and other disposables, sales totaled $11.3 million, a decline of 11% compared to second quarter last year. The decline in sales from prior year levels was anticipated as prior year sales were unusually high due to stocking orders in advance of an announced price increase. Healthcare sales for the six-month year-to-date are about even with last year, and sales for the fiscal year are expected to show a slight gain. For the Six months ended September 30, 2000 sales increased 8% from $118 million to $127 million. Surgical Urology product revenue increased 16% primarily due to strong growth in brachytherapy seeds and Suspend Sling. Aesthetic and General surgery products increased 7% reflecting 8% growth in mammary implant revenues and a 10% decrease in body contouring revenues. Clinical and Consumer Healthcare sales were flat with the previous year. Sales by Principal Product Line For the Three Months Ended For the Six Months Ended September 30, September 30, Percent Percent 2000 1999 Change 2000 1999 Change Aesthetic & General Surgery Products $35,402 $ 32,421 9% $76,228 $71,177 7% Surgical Urology Products 13,600 12,810 6% 27,555 23,735 16% Clinical & Consumer Healthcare Products 11,347 12,771 (11)% 23,351 23,234 1% $60,349 $ 58,002 4% $127,134 $118,146 8% Cost of Sales Cost of sales as a percent of net sales for the quarter and six- month period ended September 30, 2000 were 38.5% and 37.9%, respectively compared to 37.8% and 36.8% for the same periods a year ago. The Company's product mix has changed somewhat in recent years. A greater percentage of total sales are represented by two products (brachytherapy seeds and the Suspendr Sling) which are distributed under alliance agreements. These products generate gross margins of approximately 50%, which is lower than the margin generated by products manufactured and distributed by the Company. In addition, gross margins have been negatively impacted by the strength of the dollar in our European markets. Selling, General and Administrative Expenses Selling, general and administrative expenses exclusive of a second quarter restructuring charge were 39.6% of sales in the quarter compared to 41.2% in the previous year. For the six months ended September 30, 2000 selling, general and administrative expenses decreased from 41% of sales to 39.6%. The decrease reflects lower spending on the Company's direct-to- consumer advertising campaign partially offset by increases in general and administrative expenses, primarily related to an increase in product liability reserves and information technology costs. The Company announced a reduction in corporate staff at its headquarters in Santa Barbara as part of a restructuring move to streamline operations and improve efficiency. Employees affected by the restructuring were provided with a severance package, outplacement counseling and extended benefits to help with the transition. This program will result in a restructuring charge of approximately $2.4 million of which $1 million was recorded in the second quarter and $1.4 million will be recorded in the third quarter. Research and Development Research and development expenses as a percent of net sales for the quarter and six-month period ended September 30, 2000 were 8.1% and 7.2%, respectively compared to 6.7% and 6.8% for the same periods a year ago. The increase is attributable to the spending on the Company's clinical studies related to silicon gel mammary implants. In May 2000, the Company received FDA approval for saline-filled breast implants and in July received similar regulatory clearance on our inflatable penile implants. Although the Company has successfully completed these PMAA submissions, the amount of spending on research and development is not expected to decrease as the focus of research and development efforts will shift towards new product development. In addition, the Company is committed to a variety of clinical and laboratory studies in connection with its ultrasonic liposuction equipment, gel-filled mammary implants and other products. The Company has an investment in Intracel Corporation, its manufacturing partner for a potential bladder cancer treatment. The Intracel agreement required the Company to pay $1 million per year for three years to defray the costs of the clinical trials for the product. That agreement has been modified to increase Mentor's commitment by $1 million. The Company has previously paid $2 million to Intracel for the clinical trials, and will pay the remaining $2 million in quarterly payments of $250 thousand which began on July 1, 2000. Interest and Other Income and Expense Interest expense was $21 thousand in the quarter compared to $10 thousand in the same quarter of the previous year. During the quarter ended June 30, the Company borrowed under its line of credit to fund its stock repurchase program. The borrowings were repaid during the same quarter. Interest income for the three months ended September 30, 2000 increased to $1.1 million from $807 thousand for the comparable period in the previous year. The increase is a result of higher cash balances from operations and $21 million in proceeds from the sale of the remaining assets of the ophthalmic business, reported as discontinued operations, received after the second quarter in the previous year. Further, the Company increased its use of fully taxable investments, which have a higher coupon rate and has also benefited from higher prevailing interest rates. Other income and expense, primarily includes realized gains on sales of marketable securities recorded as long-term marketable securities available for sale, gains or losses on disposals of assets, and foreign currency gains or losses related to the Company's foreign operations. The Company recorded a gain on the sale of long-term marketable securities of $641,000 thousand for the three months ended September 30 and $1,098,000 for six months ended September 30, 2000. Foreign currency translation and transaction losses in the quarter were offset by gains of the disposal of assets. Income Taxes The effective rate of corporate income taxes for the year is approximately 32.8%, as compared to 31.8% in the same period a year ago. The increase in the effective rate is primarily related to utilization of research and development credits. Income from Continuing Operations Income from continuing operations for the second quarter of fiscal 2001 was unchanged from the prior year at $6.0 million. Income from continuing operations for the six-month period ended September 30, 2000 was $14.4 million compared to $13.0 million for the comparable period the prior year. The operating income of fiscal 2001 is net of the restructuring charge of $1,050,000 described above. Diluted earnings per share from continuing operations were $0.25 for the quarter compared to $0.24 for the comparable period last year, an increase of 4%. Although the increase in diluted earnings per share from continuing operations is consistent with the increase in sales, the restructuring charge offset improvements in operating trends and other efficiencies as well as the effect of fewer shares outstanding as a result of the share buyback program. Discontinued Operations In May 1999, the Company announced that its Board of Directors decided to divest the ophthalmology business, which accounted for approximately 16% of sales in fiscal 1999. The Company completed the sale of the assets of the intraocular lens portion of the ophthalmology business in the quarter ended June 30, 1999. Accordingly, the Company accounts for the ophthalmic business as a "Discontinued Operations" in accordance with Generally Accepted Accounting Principles. At March 31, 2000 the Company had completed its divestiture and discontinued operations, accordingly there were no significant remaining assets or liabilities related to the Ophthalmic division. For the quarter ended September 30, 1999 the Company had a loss on discontinued operations of $289 thousand, net of tax. Also, during the quarter ended June 30, 1999, the Company completed the sale of the assets of the intraocular lens business, recording a gain of $7.5 million, net of tax. The results of discontinued operations for the quarter ended September 30, 1999 included a $0.01 per share income for the quarter. There were no discontinued operations during the quarter ended September 30, 2000. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2000, the Company's working capital was $115 million compared to $124 million at March 31, 2000. The Company's working capital needs were provided from operations. The Company generated $12.5 million of cash from continuing operations during the six months ended September 30, 2000, compared to $12.4 million the previous year. The Company anticipates investing approximately $6 million in facilities and capital equipment in fiscal 2001. The majority of the expenditures will be for facility upgrades at the Company's facilities in The Netherlands and Texas, as well as for enhancing the Company's information technology capabilities. The Company has a line of credit for $25 million. In order to temporarily fund stock repurchases in fiscal 2001, the Company borrowed and repaid $6 million on its line of credit during the quarter ended June 30, 2000. The Company's Board of Directors has authorized an ongoing stock repurchase program. The objectives of the program, among other items, are to offset the issuance of stock options, provide liquidity to the market and to reduce the overall number of shares outstanding. Repurchases are subject to market conditions and cash availability. In May 1999, the Board increased the repurchase authorization by 4 million shares to 4.6 million shares. The Company intends to continue the share repurchase program in fiscal 2001, and repurchased 1,320 thousand shares for $25.2 million during the first two quarters, and an additional 173 thousand shares for $2.9 million early in the third quarter. As of September 30, 2000 authorization to repurchase 2.5 million shares was remaining. For the last several years, the Company has paid a quarterly cash dividend of $.025 per share. At the indicated rate of $.10 per year, the aggregate annual dividend would equal approximately $2.4 million. Certain technologies related to the manufacture of mammary prostheses were developed under a 1983 agreement with a limited partnership whereby the limited partners contributed money towards the development of the technology in exchange for payments based upon a percentage of future sales of the products utilizing the technology. The Company paid approximately $2 million in such payments to the partnership for last year. The Company was the general partner for this partnership. The agreement included an option to purchase the technology and thereby terminate the partnership. The Company exercised its option to make a lump sum payment to the Limited Partners in lieu of all future payments and rights according to the Agreement of Purchase and Sale between Mentor Corporation and the Partnership, as amended. The Limited Partners could elect to be paid in cash, Company's stock, or a combination. This transaction was completed in the second quarter ended September 30, 2000. The limited partners elected to be paid $1.0 million in cash and 434 thousand shares of the Company's common stock. The stock transfer of which is restricted by rule 144, valued at the fair market value on the date of issuance, of approximately $9 million. The decrease in payments to the partners will be offset by the increased amortization of the new intangible asset and the additional common shares outstanding, thus having a neutral effect on earnings per share. The Company's principal source of liquidity at September 30, 2000 consisted of $62 million in cash and marketable securities plus $25 million available under its line of credit. The Company believes that funds generated from operations, its cash and marketable securities and funds available under its line of credit will be adequate to meet its working capital and capital expenditure requirements through fiscal 2001. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material changes in the Company's exposure to market risk as reported in Item 7A in the annual report on Form 10-K for the fiscal year ended March 31, 2000. PART II Item 1. Legal Proceedings In regards to the litigation reported in Item 3 of the annual report on Form 10-K for the fiscal year ended March 31, 2000, there have been no material changes. Item 2. Changes in Securities During the quarter the Company issued 434,424 shares of restricted common stock, $.10 par value under rule 144. The shares were valued at fair market value on the date of issuance, August 15, 2000, at $21 per share for a total of $9,123,000. The shares were issued, along with $1 million in cash, in exchange for all rights and in lieu of all future payments due to a limited partnership established in 1983 that contributed money towards the development of certain mammary prosthesis technology. Item 3. Defaults Upon Senior Securities No event constituting a material default has occurred respecting any senior security of the Registrant. Item 4. Submission of Matters to a Vote of Security Holders At the Company's 2000 Annual Meeting of Shareholders held on September 19, 2000, the following proposals were presented: (1) A proposal to elect a Board of Directors of the Company to serve until the next annual meeting, or until their successors are elected, as follows: Name of Director Votes For Votes Withheld Christopher J. Conway 20,581,770 953,138 Anthony R. Gette 20,863,470 671,438 Eugene G. Glover 20,863,190 671,718 Walter W. Faster 20,863,570 671,338 Michael Nakonechny 20,583,670 951,238 Dr. Richard W. Young 20,863,590 671,318 Ronald J. Rossi 20,863,670 671,238 (2) A proposal to approve the Company's 2000 Long-Term Incentive Plan. The vote on proposal number 2 to approve the Company's Long-term Incentive plan was discussed and the meeting was then adjourned to be reconvened on October 19 at 10:00 a.m. in Santa Barbara, California to allow the board to collect and consider input from shareholders concerning the proposed Long-term Incentive Plan. At the reconvened meeting there were 13,153,458 (including 2,161,942 proxies given to management) votes for the proposal and 8,315,840 against. Prior to the reconvened meeting, the Company determined after considering input from the shareholders, that the number of shares authorized under the plan would be reduced from 7,500,000 to 3,000,000 shares and that the plan terms would not allow option repricing. In light of the changes made to the plan, the Board intends to submit the amended plan for shareholder vote at the next Annual shareholder's meeting. (3) A proposal to ratify the appointment of Ernst & Young LLP to act as independent auditors of the Company for the fiscal year ending March 31, 2001. The proposal received 21,460,573 votes for, and 39,481 against ratification. There were 33,854 abstentions and no broker non-votes. Item 5. Other Information The Securities and Exchange Commission informed the Company that it is investigating, under a formal order of investigation, the events relating to the March 23, 2000 USA Today article entitled "Breast Implant manufacturer under investigation by the FDA," which was authored by Rita Rubin, and the March 23, 2000 press release issued by Mentor responding to that article, and possibly other matters. The Company is cooperating fully with the SEC's investigation. An investigation does not indicate that the SEC or its staff has concluded that violations of law have occurred. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended September 30, 2000. Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. MENTOR CORPORATION (Registrant) DATE: November 10, 2000 BY: /s/CHRISTOPHER CONWAY Christopher J. Conway President and Chief Executive Officer DATE: November 10, 2000 BY: /s/ADEL MICHAEL Adel Michael Senior Vice President Chief Financial Officer EX-27 2 0002.txt
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