Filed by Bowne Pure Compliance
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the fiscal year ended March 31, 2007
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
Commission File No. 001-31744
MENTOR CORPORATION
(Exact name of registrant as specified in its charter)
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| Minnesota
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41-0950791 |
| (State or other jurisdiction of
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(IRS Employer Identification No.) |
| incorporation or organization) |
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201 Mentor Drive, Santa Barbara, California 93111
(Address of principal executive offices) (Zip Code)
(805) 879-6000
(Registrant’s telephone number, including area code)
Securities registered pursuant
to 12(b) of the Act:
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| Title of Each Class:
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Name of Each Exchange on Which Registered |
| Common Shares, par value $0.10
per share |
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New York Stock Exchange |
Securities registered pursuant
to 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes þ
No
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Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
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 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 þ No o
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 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 þ
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule
12b-2). Yes o No þ
Based on the closing sale price on the New York Stock Exchange as of the last business day of the
Registrant’s most recently completed second fiscal quarter (September 30, 2006), the aggregate
market value of the Common Shares of the Registrant held by non-affiliates of the Registrant was
approximately $1,317,071,195. For purposes of this calculation, shares held by each executive
officer, director and holder of 10% or more of the
outstanding shares of the Registrant have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of May 23, 2007, there were approximately 39,732,344 Common Shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for its Annual Meeting of Shareholders to be held on
September 17, 2007 are incorporated by reference into Part III of this Form 10-K.
MENTOR CORPORATION
TABLE OF CONTENTS
2
PART I
FORWARD-LOOKING STATEMENTS
Unless the context indicates otherwise, when we refer to “Mentor,” “we,” “us,” “our,” or the
“Company” in this Form 10-K, we are referring to Mentor Corporation and its subsidiaries on a
consolidated basis. Various statements in this Form 10-K or incorporated by reference into this
Form 10-K, in future filings by us with the U.S. Securities and Exchange Commission (the “SEC”), in
our press releases and in our oral statements made by or with the approval of authorized personnel,
constitute “forward-looking statements” within the meaning of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements are based on current expectations and are indicated
by words or phrases such as “anticipate,” “estimate,” “expect,” “intend,” “project,” “plan,”
“believe,” “will,” “seek,” and similar words or phrases and involve known and unknown risks,
uncertainties and other factors which may cause actual results, performance or achievements to be
materially different from any future results, performance or achievements expressed or implied by
such forward-looking statements. Some of the factors that could affect our financial performance
or cause actual results to differ from our estimates in, or underlying, such forward-looking
statements are set forth under “Item 1A -Risk Factors” or elsewhere in this Form 10-K.
Forward-looking statements include statements regarding, among other things:
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Our anticipated growth strategies; |
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Our intention to introduce or seek approval for new products; |
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Our ability to continue to meet United States Food and Drug Administration (“FDA”) and
other regulatory requirements; |
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Our anticipated outcomes of litigation and regulatory reviews; and |
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Our ability to replace sources of supply without disruption and regulatory delay. |
These forward-looking statements are based largely on our expectations and are subject to a number
of risks and uncertainties, many of which are beyond our control. Actual results could differ
materially from these forward-looking statements as a result of the facts described in “Item 1A -
Risk Factors” or elsewhere including, among others, problems with suppliers, changes in the
competitive marketplace, significant product liability or other claims, product recalls,
difficulties with new product development, the introduction of new products by our competitors,
changes in the economy, FDA or other regulatory delay in approval or rejection of new or existing
products, changes in Medicare, Medicaid or third-party reimbursement policies, changes in
government regulations, use of hazardous or environmentally sensitive materials, inability to
implement new information technology systems, inability to integrate new acquisitions, and other
events. We undertake no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. In light of these risks and
uncertainties, we cannot assure you that the forward-looking information contained in this Form
10-K will, in fact, transpire.
ITEM 1. BUSINESS.
Mentor Corporation was incorporated in Minnesota in 1969. Our fiscal year ends on March 31, and
references to fiscal 2007, fiscal 2006 or fiscal 2005 refer to the years ended March 31, 2007, 2006
or 2005, respectively.
General
We develop, manufacture, license and market a range of products serving the aesthetic market,
including plastic and reconstructive surgery. Our products include surgically implantable breast
implants for plastic and reconstructive surgery, as well as capital equipment and consumables used
for soft tissue aspiration or body contouring (liposuction), and facial rejuvenation products
including various types of products for skin restoration.
3
Historically, we operated in three reportable segments: aesthetic and general surgery, surgical
urology, and clinical and consumer healthcare. On May 17, 2006, we entered into a definitive
purchase agreement to sell our surgical urology and clinical and consumer healthcare business
segments (collectively, the “Urology Business”) to Coloplast A/S (“Coloplast”) for total
consideration of $463 million ($456 million in cash and the remainder consisting of the value of an
indemnification provided by Coloplast to Mentor related to certain foreign tax credits that arose
from the transaction). On June 2, 2006, the sale of the Urology Business was completed. The
transaction was subject to a post-closing adjustment of
$2.7 million that was paid by us to Coloplast in the fourth
quarter of fiscal 2007.
Principal Products and Markets
Our aesthetic products fall into three general categories: breast implants, body contouring, and
other aesthetics which includes facial aesthetics products. These three product lines are
considered one segment for financial reporting purposes. Net sales for each of these product
categories and the percentage contributions of such net sales to total net sales are as follows:
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Year Ended March 31, |
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2007 |
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2006 |
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2005 |
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Amount |
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Amount |
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Amount |
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% |
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Breast implants |
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$ |
262,556 |
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87.0 |
% |
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$ |
233,189 |
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87.0 |
% |
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217,420 |
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86.4 |
% |
Body contouring |
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16,734 |
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5.5 |
% |
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17,782 |
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6.6 |
% |
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18,609 |
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7.4 |
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Other aesthetics, including non-
surgical facial products |
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22,684 |
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7.5 |
% |
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17,301 |
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6.4 |
% |
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15,697 |
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6.2 |
% |
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Total |
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301,974 |
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100.0 |
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$ |
268,272 |
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100.0 |
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$ |
251,726 |
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100.0 |
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We develop, produce, and market a broad line of breast implants, including saline-filled implants
and silicone gel-filled (MemoryGel™ and Contour Profile® brand) implants. Our breast
implants consist of a silicone elastomer shell that is either filled during surgery with a saline
solution or pre-filled during the manufacturing process with silicone gel. Our MemoryGel™ breast
implants incorporate silicone gel with varying degrees of cohesiveness. Additionally, our implants
have either a smooth or textured surface and are provided in a variety of sizes and shapes to meet
the varying preferences of patients and surgeons.
Mammary prostheses have applications in both cosmetic and reconstructive plastic surgery
procedures. These prostheses are used in augmentation procedures to enhance breast size and shape,
correct breast asymmetries and help restore fullness after breast feeding. During reconstruction
procedures, mammary prostheses are utilized as a surgical solution to create a breast mound
following a mastectomy. Breast reconstruction is a surgical option for many women following a
mastectomy, either at the time of surgery or a later date.
We estimate the size of the markets for our products using external data and management judgment.
We believe the worldwide breast aesthetics market to be approximately $650 million to $700 million.
We work actively with the U.S. Food and Drug Administration (“FDA”) as we seek approvals of our
pre-market approval applications and carry out our post-approval conditions. We also work with
non-U.S. agencies related to these processes. Following are some key dates related to these
activities:
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On November 17, 2006, we announced that the FDA approved for sale our MemoryGelÔ
silicone gel-filled breast implants with post-approval conditions. The post-approval
conditions and other requirements associated with the FDA’s approval include the following:
continuation of the Mentor Core Study through 10 years; physician training to access the
device; a large post-approval study for 10 years; completion of additional device failure
studies; focus group studies with patients on the format and content of the approved
labeling; utilization of a formal informed decision process with patient labeling;
cessation of new enrollment in the Mentor Adjunct Study; and implementation of device
tracking. |
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On May 2, 2007, we announced that the FDA approved an amendment to our MemoryGelÔ
silicone gel-filled breast implant post-approval study (“PAS”) protocol from a mandatory to
a voluntary patient enrollment design. |
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On October 20, 2006, we received medical device licenses with terms and conditions from the
Therapeutic Products Directorate (“TPD”) of Health Canada to begin marketing and selling our
round and Contour Profile® silicone gel-filled breast implants in Canada for use
in augmentation, reconstruction and revision procedures. |
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On April 3, 2006, we submitted a pre-market approval application to the FDA for our
Contour Profile® silicone gel-filled breast implant products
(“CPG®”). The clinical portion of this application was submitted on September
30, 2006, and the application is currently under review. On September 29, 2006, we
submitted our completed modular PMA for CPG. On November 17, 2006, the FDA notified us
that they had accepted our application for filing. |
We carry a full line of breast reconstruction products including the Contour Profile Tissue
Expander (CPX™) family of breast expanders. These expansion products, used in the
first-stage of a two-stage breast reconstruction, create a pocket that will ultimately hold the
breast implant that is placed in a subsequent second-stage operation. All of the CPX devices
utilize our proprietary BufferZone®™ self-sealing technology and Centerscope™
injection port locators.
We offer a line of extremity tissue expanders. Extremity tissue expansion involves the process of
growing additional tissue for reconstruction and skin graft procedures. Some of the major
applications of extremity tissue expansion include the correction of disfigurements such as burns,
large scars and congenital deformities.
With respect to body contouring, we market a complete line of liposuction products and disposable
supplies. We estimate the worldwide market for body contouring products to be approximately $40
million to $65 million.
In fiscal 2005, we established two new business lines in the aesthetics arena, which we categorize
under “other aesthetics”: Mentor Solutions and facial aesthetics. The Mentor Solutions business
line began with our acquisition of Inform Solutions, Inc. in fiscal 2005. The Mentor Solutions
group offers software, consulting and business management tools to help plastic surgeons grow their
business.
In facial aesthetics, we supply dermal filler products and cosmeceutical products that help plastic
surgeons and dermatologists treat a variety of skin conditions. We estimate the worldwide market
for facial aesthetics products to be approximately $450 million to $500 million. Currently, we
sell a line of dermal filler products outside of the United States for the cosmetic correction of
lines, folds and wrinkles. Specifically, such products include Puragen™, our double cross-linked
hyaluronic acid-based dermal filler for which we are pursuing regulatory approval in the United
States, and Prevelle™, a single cross-linked hyaluronic acid-based dermal filler that we
distribute pursuant to a commercialization agreement with Genzyme Corporation (“Genzyme”).
Together, these products complement each other by offering treatment options for a wide variety of
patients looking for wrinkle correction. Further, as part of the commercialization agreement with
Genzyme, Mentor and Genzyme have also partnered to develop dermal gel extra (“DGE”), a
“next-generation” hyaluronic acid-based dermal filler product.
In March 2006, we signed a non-binding letter of intent with Niadyne, Inc., to distribute Niadyne’s
innovative NIA 24™ line of science-based cosmeceutical products used to improve and
restore the healthy appearance of the skin. Sales commenced in May of 2006, and we signed an
exclusive distribution agreement with Niadyne in October 2006. The products have begun to gain
acceptance with plastic surgeons.
On October 30, 2006, we announced that we had entered into the aforementioned commercialization
agreement with Genzyme, under which Genzyme will manufacture and develop future hyaluronic acid
dermal filler products which we will market and distribute through our sales channels.
We are developing a next-generation botulinum toxin type A product based on proprietary technology.
We estimate the worldwide market for botulinum toxin products to be approximately $1.4 billion, of
which approximately 55% relates to therapeutic uses and 45% to cosmetic use. During fiscal 2005, we
initiated the United States phase I dose-escalation study for cosmetic indications and during
fiscal 2006 we initiated the United States phase II dose-finding study for cosmetic indications.
Both phase I and II studies have been completed. The phase III Studies are comprised of three
separate protocols, two of which were submitted to FDA as Special Protocol Assessments. The first
is a single treatment safety and efficacy study, while the second is a repeat treatment safety and
efficacy trial.
5
The third study, for which subjects from the phase I and II trials and the first (and possibly
second) phase III trials will be eligible, is designed to collect long term safety data over a
three year period. We received FDA approval for the phase IIIa study on May 15, 2007 and have
initiated the study. In addition, in early fiscal 2007 we initiated the United States phase I
dose-escalation study focused on the treatment of adult-onset spasmodic torticollis/cervical
dystonia.
Sales and Marketing
We employ a domestic sales force for our aesthetic surgery product lines and specialists to support
body contouring. The sales force provides product information and specific data support and
related services to physicians, nurses and other health care professionals. We promote our
products through participation in and sponsorship of medical conferences and educational seminars,
specialized websites, journal advertising, direct mail programs, and a variety of marketing support
programs. One of our most successful marketing initiatives in the past year has been our Mentor
Masters Series which is an ongoing educational event that allows physicians to visit our
manufacturing facility in Dallas, Texas and see first hand how our products are manufactured. We
are currently the only company that manufactures breast implants in the United States. We employ
rigorous quality standards carried out by our long-tenured staff. In addition, we contribute to
organizations that provide counseling and education for patients suffering from certain conditions,
and we provide educational materials for our products to physicians for use with their patients.
Upon the approval of MemoryGel breast implants in the third quarter of fiscal 2007 in the U.S. and
Canada, we launched a comprehensive marketing program to both physicians and patients on silicone
gel implants. Our MemoryGel.com website is a one-stop easy resource for physicians and office staff
to obtain all the required education and information they need to begin using these products. In
addition, we supplied every physician office with a MemoryGel Starter Kit that was designed to help
them educate and advertise these products to their patients through ready-made consumer
advertisements and simple educational tools. We also offer a service called “Ask Diane” which
allows patients to contact one of our on-staff nurses for questions about products or procedures.
International Operations
We provide most of our product lines to markets outside of the U.S., principally to Canada, Europe,
Central and South America, and the Pacific Rim. Products are sold through our direct international
sales offices in Canada, the United Kingdom, Germany, France, Australia, Spain and Italy,
as well as through independent distributors in other countries. Total foreign net sales, which are
made through distributors and direct international sales offices, for continuing operations were
$84.2 million, $75.5 million, and $65.2 million in fiscal 2007, 2006 and 2005, respectively. Other
than sales made through our international sales offices, which are denominated in the local
currency of the sales office, international sales are made in U.S. dollars.
In addition, we manufacture mammary implants in The Netherlands and facial products in the United
Kingdom. During fiscal 2007, we recorded a $2.6 million impairment charge related to our decision
to close our manufacturing and research facility in Scotland. We anticipate the closure will take
place in early fiscal 2008. Total long-lived assets, excluding those related to discontinued
operations, located in foreign countries were $21.5 million and $23.7 million as of March 31, 2007
and 2006, respectively.
For additional information regarding our international operations, see “Note T – Segment
Information for Continuing Operations” of the “Notes to the Consolidated Financial Statements.”
Competition
We believe we are one of the leading suppliers of cosmetic and reconstructive surgery products. In
the domestic breast implant market, we currently compete primarily with one other company,
Allergan, Inc. (“Allergan”), which acquired Inamed Corporation, our largest competitor in the U.S.
for our breast aesthetics products, in March 2006. As a result of Allergan’s acquisition of
Inamed, we are now competing against a much larger company. The principal competitive factors in
this market are product performance and quality, range of styles and sizes, proprietary design,
warranty programs, customer service and, in certain instances, price. In addition to current
competition from
Allergan, there is a strong possibility of additional competition from new entrants into the U.S.
market. Several companies have clinical studies underway to receive FDA approval to market their
own silicone- and saline-filled breast implants. Outside the U.S., we compete with Allergan and
various smaller competitors. Notwithstanding relative sizes, some of the smaller competitors have
strong market positions in their home markets, which increases the challenges associated with
maintaining and growing our international business.
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In facial aesthetics, we are a new entrant in the worldwide market and consequently are not a
leading competitor. The commercialization agreement reached with Genzyme for hyaluronic acid
dermal fillers is expected to provide significant benefit in the future as we access their
manufacturing and research and development expertise in hyaluronic acid technology. The facial
aesthetics market has many competitors, domestically and internationally, some with hyaluronic
acid-based products similar to ours, and some with different products and technologies.
Government Regulations
General
Our manufacturing processes and facilities are subject to continuing review by the FDA and various
state and international agencies (“Agencies”). These Agencies inspect our processes and facilities
from time to time to determine whether we are in compliance with various regulations relating to
manufacturing practices and other requirements. These Agencies have the power to prevent or limit
further marketing of products based upon the results of these inspections. These regulations
depend heavily on administrative interpretation. Future interpretations made by these Agencies
could adversely affect us. Failure to comply with these Agencies’ regulatory requirements may
result in enforcement action by these Agencies, including product recalls, suspension or revocation
of product approval, seizure of product to prevent distribution, imposition of injunctions
prohibiting product manufacture or distribution, and civil or criminal penalties.
Advertising and promotion of medical devices and biologic products are regulated by the FDA, the
Federal Trade Commission (“FTC”) and other agencies in the U.S. and by comparable agencies
internationally. A determination that we are in violation of regulatory requirements governing
promotional activities could lead to imposition of various penalties, including warning letters,
product recalls, injunctive relief, and civil or criminal penalties.
Products and materials manufactured internationally may come under Homeland Security statutes from
time to time and could be considered for restricted entry into the U.S. by the FDA and U.S.
Customs. The restricted entry of such products and materials could affect the manufacturing and
sale of product domestically and internationally. Our products may also be subject to export
control regulations.
We have incurred, and will continue to incur, substantial expenses related to laboratory and
clinical testing of new and existing products, and the preparation and filing of documents required
by the FDA for pre-market approval or clearance. The process of obtaining pre-market approval or
clearance can be time-consuming and expensive, and there is no assurance that such approvals or
clearances will be granted. We 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 our ability to commercialize new products or
additional applications for existing products.
U.S. Regulation of Medical Devices
Under the Federal Food, Drug, and Cosmetic Act (“FDCA”) as amended, the FDA has the authority to
adopt regulations that (i) set standards and general controls for medical devices; (ii) require
demonstration of safety and effectiveness or substantial equivalence to a legally marketed device
prior to marketing devices for which the FDA requires pre-market approval or clearance; (iii)
require laboratory and/or animal test data to be submitted to the FDA prior to testing of devices
in humans; (iv) establish Good Manufacturing Practices (“GMPs”), referred to as Quality System
Regulation (“QSR”), that must be followed in device manufacture; (v) permit detailed inspections of
device manufacturing facilities for compliance with QSR; (vi) require compliance with certain
labeling requirements; (vii)
require reporting of certain adverse events, device malfunctions, and other post-market information
to the FDA; and (viii) prohibit device exports that do not meet certain requirements. The FDA also
regulates marketing and promotional activities by device companies. Essentially all of our
currently marketed products are medical devices and, therefore, are subject to regulation by the
FDA in the U.S. and analogous governmental Agencies in countries outside the U.S. to which we
export our products. We expect other products, such as Puragen Plus™, that we are
developing also to be subject to FDA regulation as medical devices.
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The FDCA established complex procedures for FDA regulation of devices. Devices are placed in three
classes: Class I (general controls, such as establishment registration, device listing, and
labeling requirements), Class II (special controls, such as industry standards or FDA guidance
documents, in addition to general controls), and Class III (a pre-market approval application
(“PMA”) before commercial marketing). Class III devices are the most extensively regulated. Class
III devices require each manufacturer to submit to the FDA a PMA that includes information
demonstrating the safety and effectiveness of the device. The majority of our aesthetic surgery
products are in Class III.
As described earlier, in November 2006, the FDA approved our PMA application for our
MemoryGel™ round silicone gel-filled breast implants for breast augmentation,
reconstruction and revision. Pursuant to conditions of approval set forth in the FDA’s approval
letter, we are required to conduct a large, 10-year post-approval study of 42,900 women. This
study is intended to address specific issues relating to long-term health consequences. We are
incurring, and expect to continue to incur, additional expenses in connection with the conduct of
this study, which could be substantial.
As described earlier, on September 29, 2006, we submitted the completed modular PMA application to
the FDA for our Contour Profile® silicone gel-filled breast implant products
(“CPG®”). The application is currently under review.
Regulation of Biologics
Certain other products being developed by us are regulated by the FDA as biologics under the Public
Health Service Act and require pre-market approval, and are subject to regulations and requirements
on preclinical and clinical testing, manufacture, labeling, quality control, storage, advertising,
promotion, marketing, distribution and export. Prior to commercial sale of a biologic, a Biologics
License Application (“BLA”) that includes results from required, well-controlled clinical trials to
establish the safety and effectiveness for the product’s intended use, and specified manufacturing
information, must be submitted to and approved by the FDA. FDA inspection of the manufacturing
facility during review of the BLA is required to ensure that manufacturing processes conform to
FDA-mandated GMPs. Continued compliance with GMPs is required after product approval, and
post-approval changes in manufacturing processes or facilities, product labeling, or other areas
require FDA review and approval. We are also subject to regulation by the U.S. Department of
Health and Human Services, Centers for Disease Control, due to the nature of the biological agent
used to manufacture our botulinum toxin product, Clostridium botulinum type A, which is still in
the development phase. Failure to comply with the regulations and requirements of these various
agencies could affect our ability to manufacture products and may have a significant negative
future impact on sales and results of operations.
Additional Regulations
As a manufacturer of medical devices and biologics, our manufacturing processes and facilities are
subject to regulation and review by international regulatory agencies for products sold
internationally, most notably in Canada and the European Union (“EU”).
On October 20, 2006, Health Canada approved Medical Device Licenses for our round and Contour
Profile Gel silicone gel-filled breast implants.
A medical device may only be marketed in the EU if it complies with the Medical Devices Directive
(93/42/EEC) (“MDD”), the Active Implantable Medical Devices Directive (90/385/EEC) (“AIMDD”) or the
In Vitro Diagnostic Device Directive (98/97/EC) (“IVDD”), as appropriate, and bears the CE mark as
evidence of that compliance. To achieve this, the medical devices in question must meet the
“essential requirements” defined under the MDD,
AIMDD or the IVDD relating to safety and performance, and we as manufacturer of the devices must
undergo verification of our regulatory compliance by a third party standards certification
provider, known as a “Notified
8
Body”. We have obtained CE marking for our products sold in the EU
by demonstrating compliance with the MDD and ISO13485 2003 international quality system standards.
Medical device laws and regulations are also in effect in some of the other countries to which we
export our products. These range from comprehensive device approval requirements for some or all
of our medical device products, to requests for product data or certifications. Failure to comply
with these international regulatory standards and requirements, and to changes in the international
quality system standards, could affect our ability to market and sell products in these markets and
may have a significant negative impact on sales and results of operations.
We are developing additional products in the area of biologics, which will be regulated as
medicinal products in the EU and as such will require a marketing authorization before they can be
introduced into the market. There are three routes by which this can be achieved: the centralized
procedure whereby an approval granted by the European Commission permits the supply of the product
in question throughout the EU; the Mutual Recognition Procedure (“MRP”) whereby a marketing
authorization is granted by one national authority and is subsequently recognized by the
authorities of the other member states in which we intend to supply the products; or the
decentralized procedure, whereby an application for a marketing authorization is submitted
simultaneously to the member states in which we intend to supply the products. The centralized
procedure is compulsory for biotechnology products and is optional for certain high-technology
products. All such products which are not authorized by the centralized route must be authorized
by the MRP or the decentralized procedure unless the product is designed for a single EU country,
in which case a national application can be made. In each case, the application must contain full
details of the product and the research that has been carried out to establish its efficacy, safety
and quality.
Our present and future business has been and will continue to be subject to various other laws and
regulations, including state and local laws relating to such matters as safe working conditions and
disposal of potentially hazardous substances. We may incur significant costs in complying with
such laws and regulations now, or in the future, and any failure to comply may have a material
adverse impact on our business.
Environmental Regulation
We are subject to federal, state, local and foreign environmental laws and regulations. Our
manufacturing and research and development activities involve the controlled use of potentially
hazardous materials, chemicals and biological materials, which require compliance with various laws
and regulations regarding the use, storage, and disposal of such materials. We believe that our
operations comply in all material respects with applicable environmental laws and regulations in
each country where we have a business presence. Although we continue to make expenditures for
environmental protection, we do not anticipate any additional significant expenditures, in
complying with such laws and regulations, that would have a material impact on our results of
operations or competitive position. We are not aware of any pending litigation or significant
financial obligations arising from current or past environmental practices that are likely to have
a material adverse effect on our financial position. We cannot provide any assurance, however,
that environmental claims will not develop in the future, including claims for indemnification,
relating to our operations or properties owned or operated by us, or those properties previously
owned by us and divested as part of the transaction with Coloplast, nor can we predict whether any
such claims, if they were to develop, would require significant expenditures on our part.
Violations of environmental health and safety laws could occur in the future as a result of the
inability to obtain permits, human error, equipment failure or other causes, which could result in
fines and penalties or adversely affect our operating results and harm our business. In addition,
environmental laws could become more stringent over time, imposing greater compliance costs and
increasing risks and penalties associated with violations.
We are subject to regulation by the United States Environmental Protection Agency and other state
and local environmental agencies in each of our domestic manufacturing facilities. For example, in
Texas, we are subject to regulation by the local Air Pollution Control District as a result of some
of the chemicals used in our manufacturing processes. Failure to comply with the regulations and
requirements of these various agencies could affect our ability to manufacture our existing
products or could result in a claim for indemnification and may have a significant negative impact
on sales and results of operations, including discontinued operations.
9
Medicare, Medicaid and Third-Party Reimbursement
Health care providers that purchase medical devices, such as our products, sometimes rely on
third-party payors, including the Medicare and Medicaid programs and private payors, such as
indemnity insurers, employer group health insurance programs and managed care plans, to reimburse
all or part of the cost of the products. In the United States, our aesthetics products are sold
principally to hospitals, surgery centers and surgeons. We invoice our customers and they remit
directly to us. In some cases, the patient and the procedure may be eligible for reimbursement by
third-party payors, including Medicare, Medicaid and other similar programs, but this coverage is
invisible to us on a case-by-case basis. However, we are aware that some of our customers are
being reimbursed, in full or in part, for our products or for procedures that utilize our products.
The majority of procedures that utilize our products are not reimbursable by these third-party
payors. Nevertheless, reimbursement can be a significant market factor when the product cost
represents a major portion of the total procedure cost and the reimbursement for that procedure (or
alternative procedures) is changing or influencing treatment decisions. As a result, demand for
our products is dependent in part on the coverage and reimbursement policies of these payors. The
manner in which reimbursement is sought and obtained for any of our products varies based upon the
type of payor involved and the setting in which the product is furnished and utilized by patients.
Payments from Medicare, Medicaid and other third-party payors are subject to legislative and
regulatory changes and are susceptible to budgetary pressures. Some of our customers’ revenues and
ability to purchase our products and services is therefore subject to the effect of those changes
and to possible reductions in coverage or payment rates by third-party payors. Any changes in the
health care regulatory, payment or enforcement landscape relative to our customers’ health care
services may negatively affect our operations and revenues. Discussed below are certain factors
which could have a negative impact on our future operations and financial condition. It is
difficult to predict the effect of these factors on our operations; however, the effect could be
negative and material.
Medicare Overview
Medicare is a federal program administered by the Centers for Medicare and Medicaid Services
(“CMS”), formerly known as HCFA, through fiscal intermediaries and carriers. Available to
individuals age 65 or over, and certain other classes of individuals, the Medicare program
provides, among other things, health care benefits that cover, within prescribed limits, the major
costs of most medically necessary care for such individuals, subject to certain deductibles and
co-payments. There are three components to the Medicare program relevant to our business: Part A,
which covers inpatient services, home health care and hospice care; Part B which covers physician
services, other health care professional services and outpatient services; and Part C or Medicare
Advantage, which is a program for managed care plans.
The Medicare program has established guidelines for the coverage and reimbursement of certain
equipment, supplies and services. In general, in order to be reimbursed by Medicare, a health care
item or service furnished to a Medicare beneficiary must be reasonable and necessary for the
diagnosis or treatment of an illness or injury or to improve the functioning of a malformed body
part. The methodology for determining (1) the coverage status of our products; and (2) the amount
of Medicare reimbursement for our products, varies based upon, among other factors, the setting in
which a Medicare beneficiary received health care items and services. Any changes in federal
legislation, regulations and policy affecting Medicare coverage and reimbursement relative to our
products could have a material effect on our performance.
A portion of our revenue is derived from our customers who operate inpatient hospital facilities.
Acute care hospitals are generally reimbursed by Medicare for inpatient operating costs based upon
prospectively determined rates. Under the Prospective Payment System, or PPS, acute care hospitals
receive a predetermined payment rate based upon the Diagnosis-Related Group, or DRG, into which
each Medicare beneficiary stay is assigned, regardless of the actual cost of the services provided.
Certain additional or “outlier” payments may be made to a hospital for cases involving unusually
high costs. Accordingly, acute care hospitals generally do not receive direct Medicare
reimbursement under PPS for the distinct costs incurred in purchasing our products. Rather,
reimbursement for these costs is deemed to be included within the DRG-based payments made to
hospitals for the services furnished to Medicare-eligible inpatients in which our products are
utilized. Because PPS payments are based on predetermined
rates and are often less than a hospital’s actual costs in furnishing care, acute care hospitals
have incentives to lower their inpatient operating costs by utilizing equipment, devices and
supplies, that will reduce the length of inpatient stays, decrease labor or otherwise lower their
costs. Our product revenue could be affected negatively if acute care hospitals discontinue
product use due to insufficient reimbursement, or if other treatment options are perceived to be
more profitable.
10
Medicare — Outpatient Hospital Setting
CMS implemented the hospital Outpatient Prospective Payment System, or OPPS, effective August
2000. OPPS is the current payment methodology for hospital outpatient services, among others.
Services paid under the OPPS are classified into groups called Ambulatory Payment Classifications,
or APCs. Services grouped within each APC are similar clinically and in terms of the resources
they require. A payment rate is established for each APC through the application of a conversion
factor that CMS updates on an annual basis. OPPS may cause providers of outpatient services with
costs above the payment rate to incur losses on such services provided to Medicare beneficiaries.
The Balanced Budget Refinement Act of 1999 provides for temporary financial relief from the effects
of OPPS through the payment of additional outlier payments and transitional pass-through payments
to outpatient providers reimbursed through OPPS who qualify for such assistance. Transitional
pass-through payments are required for new or innovative medical devices, drugs, and biological
agents. The purpose of transitional pass-through payments is to allow for adequate payment of new
and innovative technology until there is enough data to incorporate cost for these items into the
base APC group. The qualification of a device for transitional pass-through payments is temporary.
Our products do not currently qualify for pass-through payments.
Annually CMS proposes and, after consideration of public comment, implements changes to OPPS and
payment rates for the following calendar year. The OPPS methodology determines the amount
hospitals will be reimbursed for procedures performed on an outpatient basis and determines the
profitability of certain procedures for the hospital and may impact hospital purchasing decisions.
We cannot predict the final effect that any change in OPPS regulations, including future annual
updates, will have on our customers or sales. Any such effect, however, could be negative if APC
groupings become less advantageous, reimbursement allowables decline, or if the OPPS is modified in
any other manner detrimental to our business.
Medicaid
The Medicaid program is a cooperative federal/state program that provides medical assistance
benefits to qualifying low-income and medically needy persons. State participation in Medicaid is
optional and each state is given discretion in developing and administering its own Medicaid
program, subject to certain federal requirements pertaining to payment levels, eligibility criteria
and minimum categories of services. The coverage, method and level of reimbursement varies from
state to state and is subject to each state’s budget constraints. Changes to any state’s coverage,
method or level of reimbursement for our products may affect future revenue negatively if
reimbursement amounts are decreased or discontinued.
Private Payors
Many third-party private payors, including indemnity insurers, employer group health insurance
programs and managed care plans, presently provide coverage for the purchase of our products. The
scope of coverage and payment policies varies among third-party private payors. Furthermore, many
such payors are investigating or implementing methods for reducing health care costs, such as the
establishment of capitated or prospective payment systems. Cost containment pressures have led to
an increased emphasis on the use of cost-effective technologies and products by health care
providers. Future changes in reimbursement methods and cost control strategies may limit or
discontinue reimbursement for our products and could have a negative effect on sales and results of
operations.
Health Care Fraud and Abuse Laws and Regulations
The federal government has made a policy decision to significantly increase the financial resources
allocated to enforcing the health care fraud and abuse laws. Private insurers and various state
enforcement agencies also have increased their level of scrutiny of health care claims and
arrangements in an effort to identify and prosecute fraudulent and abusive practices in the health
care industry. We monitor compliance with federal and state laws and regulations applicable to the
health care industry in order to minimize the likelihood that we would engage in conduct or enter
into contracts that could be deemed to be in violation of the fraud and abuse laws. The health
care fraud and abuse laws to which we are subject include the following, among others:
11
Federal and State Anti-Kickback Laws and Safe Harbor Provisions
The federal anti-kickback laws make it a felony to knowingly and willfully offer, pay, solicit or
receive any form of remuneration in exchange for referring, recommending, arranging, purchasing,
leasing or ordering items or services covered by a federal health care program, including Medicare
or Medicaid, subject to various “safe harbor” provisions. The anti-kickback prohibitions apply
regardless of whether the remuneration is provided directly or indirectly, in cash or in kind.
Various state laws have similar prohibitions that are sometimes broader in nature.
Interpretations of the law have been very broad. Under current law, courts and federal regulatory
authorities have stated that the federal law is violated if even one purpose (as opposed to the
sole or primary purpose) of the arrangement is to induce referrals. A violation of the federal
statute is a felony and could result in civil and administrative penalties, including exclusion
from the Medicare or Medicaid program, even if no criminal prosecution is initiated.
The Department of Health and Human Services has issued regulations from time to time setting forth
safe harbors, which would guarantee protection of certain limited types of arrangements from
prosecution under the statute if all elements of a particular safe harbor are met. However,
failure to fall within a safe harbor or within each element of a particular safe harbor does not
mean that an arrangement is per se in violation of the federal anti-kickback laws. As the comments
to the safe harbors indicate, the purpose of the safe harbors is not to describe all illegal
conduct, but to set forth standards for certain non-violative arrangements. If an arrangement
violates the federal anti-kickback laws and full compliance with a safe harbor cannot be achieved,
we risk greater scrutiny by the Office of the Inspector General, (“OIG”), and, potentially, civil
and/or criminal sanctions. We believe our arrangements are in compliance with the federal
anti-kickback laws and analogous state laws; however, regulatory or enforcement authorities may
take a contrary position, and we cannot assure that these laws will ultimately be interpreted in a
manner consistent with our practices.
Federal False Claims Act
Although we do not submit claims for payment directly to the federal government, we may become
subject to state and federal laws that govern the submission of claims for reimbursement by virtue
of the submission of such claims by our customers. The federal False Claims Act imposes civil
liability on individuals or entities that submit (or “cause” to be submitted) false or fraudulent
claims to the government for payment. Violations of the False Claims Act may result in civil
monetary penalties for each false claim submitted and treble damages. In addition, we could be
subject to criminal penalties under a variety of federal statutes to the extent that we knowingly
violate legal requirements under federal health programs or otherwise present (or cause to be
presented) false or fraudulent claims or documentation to the government. In addition, the OIG may
impose extensive and costly corporate integrity requirements upon a health industry participant
that is the subject of a false claims judgment or settlement. These requirements may include the
creation of a formal compliance program, the appointment of a government monitor, and the
imposition of annual reporting requirements and audits conducted by an independent review
organization to monitor compliance with the terms of any such compliance program, as well as the
relevant laws and regulations.
The False Claims Act also allows a private individual to bring a “qui tam” suit on behalf of the
government for violations of the False Claims Act, and if successful, the “qui tam” individual
shares in the government’s recovery. A qui tam suit may be brought, with only a few exceptions, by
any private citizen who has material information of a false claim that has not yet been previously
disclosed. Recently, the number of qui tam suits brought in the health care
industry has increased dramatically. In addition, several states have enacted laws modeled after
the False Claims Act.
Under the Deficit Reduction Act of 2005, Congress encouraged states to enact state false claims
acts that are similar to the federal False Claims Act, including “qui tam” provisions. As states
enact such laws, the risk of being subject to a state false claims action will increase.
12
Additionally, the U.S. Foreign Corrupt Practices Act, to which we are subject, prohibits
corporations and individuals from engaging in certain activities to obtain or retain business or to
influence a person working in an official capacity. It is illegal to pay, offer to pay, or
authorize payment of anything of value to any foreign government official, government staff member,
political party, or political candidate in an attempt to obtain or retain business or to otherwise
influence a person working in an official capacity. Our present and future business has been and
will continue to be subject to various other laws, rules, and/or regulations.
Product Development
We are focused on the development of new products and improvements to existing products, as well as
on obtaining FDA and other regulatory approval of certain products and processes, and we maintain
the highest quality standards of existing products. During fiscal years 2007, 2006 and 2005, we
spent a total of $35.0 million, $29.0 million and $25.2 million, respectively, for research and
development primarily in support of our silicone gel breast implant regulatory submissions in the
United States and Canada, post-approval study costs related to our silicone gel-filled breast
implants, laboratory testing and clinical studies for our hyaluronic acid-based dermal filler
Puragen™ and our botulinum toxin development projects.
Patents and Licenses
It is our policy to protect our intellectual property rights relating to our products whenever
possible and appropriate. Our patents and licenses relating to continuing operations include those
relating to tissue expanders, a combination breast implant and tissue expander (Becker implant),
breast implant manufacturing technologies, botulinum toxin, hyaluronic acid dermal fillers, and
body contouring (liposuction) equipment. We believe that although our patents and licenses are
material in their totality, no single patent or license is material to our business as a whole.
In those instances where we have acquired technology from third parties, we have sought to obtain
rights of ownership to the technology through the acquisition of underlying patents or licenses.
While we believe design, development, regulatory and marketing aspects of the medical device
business represent the principal barriers to entry into such business, we also recognize that our
patents and license rights may make it more difficult for our competitors to market products
similar to those we produce. We can give no assurance that our patent rights, whether issued,
subject to license, or in process, will not be circumvented, terminated, or invalidated. Further,
there are numerous existing and pending patents on medical products and biomaterials. We can give
no assurance that our current, former or planned products do not or will not infringe such rights
or that others will not claim such infringement or that we will be able to prevent competitors from
challenging our patents or entering markets currently served by us.
Raw Material Supply and Single Source Suppliers
We obtain certain raw materials and components for a number of our products from single source
suppliers, including our implant quality silicone elastomers and gel materials for mammary
prostheses and certain components used for those prostheses. We believe our sources of supply
could be replaced if necessary, but it is possible that the process of qualifying new materials
and/or vendors for certain raw materials and components could cause an interruption in our ability
to manufacture our products and potentially have a material negative impact on sales. No
significant interruptions to raw material supplies occurred during fiscal 2007.
Our saline-filled and MemoryGel™ breast implants and other products are available for sale in the
United States under FDA approvals and/or clearances. A change in raw material, components or
suppliers for products may require a new FDA submission, and subsequent review and approval. There
is no assurance that such a submission
would be approved without delay, or at all. Any delay or failure to obtain approval may have a
significant adverse impact on our sales and results of operations.
In connection with the sale of our Urology Business to Coloplast, we have entered into a supply
agreement with Coloplast for certain components of our breast implant products. Coloplast is our
sole source for these components, and if we were unable to obtain this supply, our business would
be harmed. We may determine that we do not want to continue to purchase products from Coloplast,
or Coloplast may be unable to meet our needs in a timely manner, either of which may disrupt our
business during the period we negotiate a supply agreement with, and qualify the manufacturing
process of, a third party or begin production of the components ourselves.
13
In addition, we depend on Genzyme for the supply of Puragen™ and Prevelle™, which are hyaluronic
acid dermal filler products we distribute outside of the United States; Tutogen Medical, Inc. for
the supply of NeoForm™, a human tissue product used in breast reconstruction procedures;
and Niadyne, Inc. for the supply of NIA-24, a line of science-based, cosmeceutical products used to
improve and restore the healthy appearance of the skin.
Seasonality
Our quarterly results reflect slight seasonality, as the second fiscal quarter ending September 30
tends to have the lowest revenue and profitability of all of the quarters. These fluctuations are
primarily due to lower levels of sales of breast implants for augmentation, an elective procedure,
as many surgeons and patients take vacation during this quarter.
Working Capital
We believe we maintain normal industry levels of inventory for our business. This includes
significant consignment inventories of our aesthetics products to aid the surgeon in correctly
sizing an implant to meet patient needs and to reduce the rate of returns of products that are
purchased in order to facilitate sizing options. Inventories are managed to levels consistent with
high levels of customer service. Additionally, new product introductions require inventory
build-ups to ensure success.
We believe our accounts receivable credit terms are consistent with normal industry practices in
the markets that we sell our products. Aesthetic surgery product return policies allow for product
returns for full or partial credit for up to six months. It is common practice to order additional
quantities and sizes to facilitate correct sizing to meet patient needs. Consequently, product
return rates are high, but we believe they are consistent with the industry rates. See
“Application of Critical Accounting Policies — Revenue Recognition” of “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
Employees
As of March 31, 2007, we employed approximately 950 people, of whom 470 were in manufacturing, 275
in sales and marketing, 70 in research and development and 135 in finance and administration. We
have never had a work stoppage due to labor difficulties, and we consider our relations with our
employees to be satisfactory.
Discontinued Operations
On May 17, 2006, we entered into a definitive purchase agreement with Coloplast for the sale of our
surgical urology and clinical and consumer healthcare business segments. Total consideration was
$463 million, $456 million in cash and $7 million consisting of an indemnification by Coloplast to
Mentor related to certain foreign tax credits that arose from the transaction. On June 2, 2006, we
completed this sale to Coloplast. The purchase agreement provides, among other things, that we
will not enter into or engage in a business that competes with the business as sold, on a worldwide
basis, for a period of seven years following the closing of the transaction. This restriction on
competition does not apply to (i) the development, manufacture or sale of any oral pharmaceuticals
or any product or treatments involving dermal fillers or other bulking agents or toxins, including
botulinum toxins, or (ii) any businesses acquired and operated by us or our affiliates for so long
as such competing businesses generate less than $5 million in aggregate annual revenues. These
restrictions on competition terminate upon a change in control of Mentor. On
June 1, 2006, our Porges SAS subsidiary sold certain intellectual property to Coloplast for $52
million. The purchase price was subject to a post-closing adjustment based on the working capital
of the Urology Business as of the closing date, and a downward reduction in an amount equal to 50%
of the amount of certain transfer taxes and related fees incurred in connection with the
transaction, 50% of the cost of severance obligations in respect of certain former employees of the
Urology Business who did not continue with the Urology Business following the closing of the
transaction, and certain other administrative costs. The post-closing adjustment of $2.7 million
was paid by us to Coloplast in the fourth quarter of fiscal 2007. The purchase agreement with Coloplast contains
customary representations and warranties and indemnification provisions whereby each party agrees
to indemnify the other for breaches of representations and warranties, breaches of covenants and
other matters, with our liability for breaches of representations and warranties generally limited
to 15% of the purchase price. Pursuant to the terms of the purchase agreement, an escrow fund was
established with $10 million withheld from the purchase price to secure our indemnification
obligations with respect to any breaches of our representations and warranties for a period of 18
months.
14
In connection with the sale, we entered into a Transition Services Agreement (“TSA”) and various
supply agreements. Pursuant to the TSA, in exchange for specified fees, we provide to Coloplast,
and Coloplast provides to us, services including accounting, clinical, information technology,
customer support and use of facilities. Under the supply agreements, we supply various products,
including silicone gel-filled testicular implants to Coloplast and Coloplast supplies us with
components for the manufacture of our breast implants. Coloplast reimburses us for certain fees
and expenses related to the services we perform under the TSA. These services agreements are
expected to extend through a period not to exceed twelve months, and the supply agreements have
terms ranging from six to 36 months. These services and supply agreements are not expected to have
a significant impact on our future cash flows from continuing operations. As of March 31, 2007,
the majority of the services contemplated under the TSA have been completed.
On June 2, 2006, we also completed the sale of our intellectual property, raw materials and
tangible assets for the production of silicone male external catheters relating to our catheter
production facility in Anoka, Minnesota and our inventory of such catheters to Rochester Medical
Corporation, for an aggregate purchase price of approximately $2 million.
Our former surgical urology segment included surgically implantable prostheses for the treatment of
impotence, surgically implantable incontinence products, urinary care products, and brachytherapy
seeds for the treatment of prostate cancer. Our former clinical and consumer healthcare products
included catheters and other products for the management of urinary incontinence and retention. As
a result of the sale to Coloplast, the assets and liabilities related to the Urology Business have
been segregated from continuing operations and are reported as assets and liabilities of
discontinued operations in the accompanying consolidated balance sheets. In addition, operations
associated with the Urology Business have been classified as income from discontinued operations in
the accompanying consolidated statements of income. Prior to being designated as discontinued
operations, the Urology Business contributed approximately 47% of our consolidated net sales and
approximately 27% of our operating profit in fiscal year 2006. We recorded a net gain on the sale
of our Urology Business in the first quarter of fiscal 2007. As a result of this sale, we are able
to focus on the aesthetic market. We intend to leverage our traditional strengths in plastic
surgery and grow our market presence in cosmetic dermatology with products for both surgical and
non-surgical procedures.
15
Executive Officers of the Registrant
Our executive officers as of May 23, 2007 are listed below, followed by brief accounts of their
business experience and certain pertinent information as of that date.
| |
|
|
|
|
| Name |
|
Age |
|
Position |
| |
Joshua H. Levine |
|
48 |
|
President and Chief Executive Officer |
Edward S. Northup |
|
58 |
|
Vice President, Chief Operating Officer |
Loren L. McFarland |
|
48 |
|
Vice President, Chief Financial Officer and Treasurer |
Joseph A. Newcomb |
|
56 |
|
Vice President, General Counsel and Secretary |
Cathy S. Ullery |
|
54 |
|
Vice President, Human Resources |
Joshua H. Levine has served as our President and Chief Executive Officer and a director since June
of 2004. Mr. Levine began his career with us in October of 1996 as Vice President,
Sales-Aesthetic Products and advanced through positions of increasing responsibility in the
aesthetic business franchise including V.P., Sales and Marketing-Domestic and V.P., Sales and
Marketing-Global. In June of 2002, Mr. Levine was named Senior V.P., Global Sales and Marketing
and an executive officer of Mentor Corporation. In December of 2003, Mr. Levine was promoted to
President and Chief Operating Officer, the position he held until being named to his current
position as Chief Executive Officer. Prior to joining us, Mr. Levine was employed from 1989
through 1996 with Kinetic Concepts, Inc., a specialty medical equipment manufacturer, in a variety
of executive level sales and marketing positions, ultimately serving as Vice President and General
Manager of KCI’s Home Care Division. Mr. Levine began his career in healthcare with American
Hospital Supply Corporation in 1982 and continued with the organization after it was acquired by
Baxter Travenol. From 1982 through 1988, Mr. Levine held line management sales and marketing
positions across a variety of manufacturing, distribution and service businesses. Mr. Levine earned
his bachelor’s degree in Communications from The University of Arizona in Tucson.
Edward S. Northup has served as Vice President and Chief Operating Officer since February 2007.
Prior to joining us, Mr. Northup was employed with Boston Scientific Corporation for nine
years and served most recently as president of Boston Scientific’s pain management business. Mr.
Northup joined Boston Scientific in 1997 as Vice President, General Manager of Asia Pacific. In
1999, he was promoted to President Boston Scientific Japan and in 2001 to the concurrent role of
President Boston Scientific International. From 1995 to 1997, Mr. Northup was the President of the
Dynacor Division of the privately-held Medline Industries. From 1978 to 1995, Mr. Northup was
employed by Baxter Healthcare and American Hospital Supply Corporation in a variety of senior level
positions and businesses including Vice President of Baxter Cardiovascular-Far East, Vice
President, General Manager of Euromedical Industries and Director of Operations for the Pharmaseal
Division. Over the past 28 years, Mr. Northup has lived and managed businesses in North America,
Latin America, Asia/Pacific and Europe. Mr. Northup earned his bachelor’s of science degree in
Pre-Med from the University of Santa Clara and began his career in basic research in intracellular
immunity and infectious diseases at the Palo Alto Medical Research Foundation.
Loren L. McFarland has served as Chief Financial Officer and Treasurer since May 2004. He was Vice
President of Finance and Corporate Controller from 2001 to May 2004, Controller from 1989 to 2001,
Assistant Controller from 1987 to 1989 and General Accounting Manager from 1985 to 1987. Prior to
his employment with us, Mr. McFarland was employed by Touche Ross and Co., a public accounting
firm, as a Certified Public Accountant and auditor from 1981 to 1985. Mr. McFarland earned his
bachelor’s degree in Business Administration and Accounting from the University of North Dakota and
a master’s degree in Business Administration from the University of California at Los Angeles.
Joseph A. Newcomb has served as Vice President, Secretary and General Counsel since June 2006. Mr.
Newcomb previously served as Executive Vice President, General Counsel and Secretary of Inamed
Corporation from August 2002 until its acquisition by Allergan, Inc. in March 2006. From August
1997 to July 2002, Mr. Newcomb provided legal, tax and financial services to early stage and
start-up companies. From May 1989 to July 1997, he was Vice President and General Counsel for the
U.S. affiliate and portfolio companies of Brierley Investments
Limited, an international holding company, where he was an active participant in the origination of investments
and the management and operations of the portfolio companies. Mr. Newcomb earned a bachelor’s
degree in Business Administration from the University of Notre Dame, a J.D. from the University of
Connecticut and a LL.M. (Taxation) from Georgetown University Law Center. Mr. Newcomb is a
Certified Public Accountant and member of the American Institute of CPAs.
16
Cathy S. Ullery has served as Vice President, Human Resources since May 2002. Ms. Ullery joined
us in 1998 and was promoted in 1999 to Director, Human Resources. Prior to her employment
with us, Ms. Ullery was Director, Organizational Effectiveness for the City of Tucson from 1993 to
1997. From 1982 to 1993, she held various positions of increasing responsibility for the Arizona
Education Association, an affiliate of the National Education Association, ultimately serving as
the Executive Manager for Field Services and Member Programs. Ms. Ullery earned her bachelor’s
degree in Education from University of Arizona, Tucson.
Available Information
We file with the Securities and Exchange Commission (“SEC”) our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports,
proxy statements and registration statements. The public may read and copy any material we file
with the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E., Washington, D.C. 20549.
The public may also obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains its Internet site at http://www.sec.gov that
contains reports, proxy and information statements and other information regarding registrants,
including us, that file electronically.
Our primary web site is http://www.mentorcorp.com. We make available free of charge, on or through
this web site, our annual, quarterly and current reports and any amendments to those reports, as
soon as reasonably practicable after electronically filing such reports with the SEC. In addition,
copies of the written charters for the committees of our Board of Directors, our Corporate
Governance Guidelines, our Code of Ethics for Senior Financial Officers, and our Code of Business
Conduct and Ethics are also available on this web site and can be found under the Investor
Relations and Corporate Governance links. Copies are also available in print, free of charge, by
writing to Mentor Corporation, 201 Mentor Drive, Santa Barbara, CA 93111, Attn: Investor
Relations. We may post amendments or waivers about our Code of Ethics for Senior Financial
Officers and Code of Business Conduct and Ethics, if any, on our web site. This web site address
is intended to be an inactive textual reference only, and none of the information contained on our
web site is part of this report or is incorporated in this report by reference.
Forward-Looking Information Under the Private Securities Litigation Reform Action of 1995
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking
statements. The Act was designed to encourage companies to provide prospective information about
them without fear of litigation. The prospective information must be identified as forward-looking
and be accompanied by meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those projected in the statements. The statements
about our business, plans, strategies, intentions, expectations and prospects contained throughout
this document are based on current expectations. These statements are forward-looking and actual
results may differ materially from those predicted as of the date of this report, which involve
risks and uncertainties. In addition, past financial performance is not necessarily a reliable
indicator of future performance, and investors should not use historical performance to anticipate
results or future period trends. We undertake no obligation to revise or update publicly any
forward-looking statements for any reason, even if new information becomes available or other
events occur in the future.
ITEM 1A. RISK FACTORS.
Our business faces many risks. The risks described below may not be the only risks we face.
Additional risks that we do not yet know of or that we currently think are immaterial may also
impair our business operations. If any of the events or circumstances described in the following
risks actually occurs, our business, financial condition or results of operations could suffer and
the trading price of our common stock or our convertible notes could decline. You should consider
the following risks before deciding to invest in our common stock or convertible notes.
17
The FDA approval of our MemoryGel™ breast implants in the U.S. is conditioned on our compliance
with several significant post-approval conditions, including conducting a large scale, 10-year
study of patients who receive the implants. These conditions may adversely affect the market
acceptance and usage rates of our MemoryGel™ implants, may impact our ability to compete, and may
cause us to incur significant unanticipated expenses. Our failure to comply with these conditions
in a timely manner may cause delay in market acceptance or result in our inability to continue to
sell our MemoryGel™ implants in the U.S.
On November 17, 2006, the U.S. Food and Drug Administration (“FDA”) approved for sale our
MemoryGelÔ silicone gel-filled breast implants for sale with post-approval conditions. The
post-approval conditions and other requirements associated with the FDA’s approval include the
following: continuation of the Mentor Core Study through 10 years, physician training prior to
accessing the device, a large post-approval study for 10 years, completion of additional device
failure studies, focus group studies with patients on the format and content of the approved
labeling, utilization of a formal informed decision process with patient labeling, cessation of new
enrollment in the Mentor Adjunct Study, and implementation of device tracking.
Our compliance with these FDA-mandated post-approval conditions, including changes to our
post-approval study protocol effective April 2007, is dependent upon the cooperation of physicians
and patients. If we are unable to gain that cooperation, or if patients or physicians prefer to
use the competitors’ products as a result of our post-approval study requirements, there may be an
adverse effect on our ability to comply with the post-approval conditions. In addition, the
existence of the post-approval study, including administrative burden and follow-up requirements,
may adversely effect the acceptance and usage rates of our products. In connection with complying
with the post-approval conditions, we could incur significant unanticipated expenses, including
costs to gain physician and patient cooperation and costs of post-market patient monitoring and
data collection activities, which would have a material adverse effect on our market share, revenue
and results of operations. In addition, if we are unable to comply with these post-approval
conditions, the FDA may withdraw the approval of the PMA, and we would be unable to continue
selling MemoryGel™ breast implants in the U.S., which would also have a material adverse effect on
market share, revenue and results of operations. Further, our sales and results of operations
could be affected if market conversion to silicone gel-filled breast implants from saline breast
implants does not occur at the rate we anticipated.
On October 20, 2006, we received the Medical Licenses for our MemoryGel™ and Contour Profile Gel
(“CPG®”) breast implants in Canada. These licenses also came with conditions that are
similar to those required by the FDA. If we fail to comply with these post-approval conditions,
Health Canada may suspend the licenses, which would have a material adverse effect on our market
share, sales and results of operations.
Significant product liability claims or product recalls may force us to pay substantial damage
awards and other expenses that could exceed our accruals and insurance coverages.
The manufacture and sale of medical devices and biologics exposes us to significant risk of product
liability and other tort claims. Both currently and in the past, we have had a number of product
liability claims relating to our products, and we will be subject to additional product liability
claims in the future for both past and current products, some of which may have a negative impact
on our business. If a product liability claim or series of claims, including class action claims,
is brought against us for uninsured liabilities or in excess of our insurance coverage, our
business could suffer. Some manufacturers that suffered such claims in the past have been forced
to cease operations and declare bankruptcy.
Additionally, we offer product replacement and certain financial assistance for surgical procedures
that fall within our limited warranties and coverage periods of implantation on our breast implant
products, and we accrue or expense costs as incurred for those limited warranties. As a competitive market response to offers
made by our primary competitor as a result of the silicone gel breast implant post-approval
environment in the U.S., during the fourth quarter of fiscal 2007, we began a limited-time offer of
free enrollment in our Enhanced Advantage Limited Warranty for MemoryGel™ implants implanted after
February 15, 2007. Such accruals are based on estimates, taking into consideration relevant
factors such as historical experience, warranty periods, estimated costs, existence and levels of
insurance and insurance retentions, identified product quality issues, if any, and, to a limited
extent, information developed by using actuarial techniques. We assess the adequacy of
these accruals periodically and adjust the amounts as necessary based on actual experience and
changes in future expectations. From time to time, we adjust the terms of our limited warranty
programs. Changes to actual warranty claims incurred could have a material impact on the actuarial
analysis, which in turn could materially impact our reported expenses and results of operations.
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In addition to product liability or warranty claims, we could experience a material design or
manufacturing failure, a quality system failure, other safety issues, or heightened regulatory
scrutiny that would warrant a recall of products we manufacture or products we distribute that are
manufactured by another company. A recall of some of our products could result in exposure to
additional product liability claims, significant expense to perform the recall, and lost sales.
We are subject to substantial government regulation, which could have a material adverse effect on
our business.
The production and marketing of our products and our ongoing research and development activities,
including pre-clinical testing and clinical trial activities, are subject to extensive regulation
and review by numerous governmental authorities both in the U.S. and abroad. Most of the medical
devices and biologics we develop must undergo rigorous pre-clinical and clinical testing and an
extensive regulatory approval process before they can be marketed. Certain of our products are
required to undergo review by a panel of outside experts selected by the FDA, which makes a
recommendation to the FDA as to whether the product(s) should or should not be approved. This
process makes it potentially longer, more difficult, and/or more costly to bring our products to
market, and we cannot guarantee that any of our unapproved products will be approved or how long it
may take for any one particular product to be approved. The pre-marketing approval process can be
particularly expensive, uncertain and lengthy, and a number of devices, drugs and biologics for
which FDA approval has been sought by other companies have never been approved for marketing. In
addition to testing and approval procedures, extensive regulations also govern manufacturing,
packaging, labeling, storage, distribution, record-keeping, advertising, complaint handling, and
marketing procedures. If we do not comply with applicable regulatory requirements, such violations
could result in non-approval, suspensions of clinical trials, suspension or withdrawal of
regulatory approvals, product recalls, civil penalties and criminal fines, product seizures,
operating restrictions, injunctions, and criminal prosecution.
Delays in, withdrawal of, or rejection by the FDA or other government entity of approval(s) of our
products, including delay in the review of our Contour Profile Gel pre-market approval application
(“PMA”), or any significant delays in any of our PMA filings, including our Puragen™
PMA, other hyaluronic acid dermal filler PMAs, and our botulinum toxin biologics license
application (“BLA”) may also adversely affect our business. Such delays, withdrawals, or
rejections may be encountered due to, among other reasons, government or regulatory delays, lack of
demonstrated safety or efficacy during clinical trials, safety issues, manufacturing issues, slower
than expected rate of patient recruitment for clinical trials, inability to follow patients after
treatment in clinical trials, inconsistencies between early clinical trial results and results
obtained in later clinical trials, varying interpretations of data generated by clinical trials,
adverse publicity, or changes in regulatory policy or requirements in the U.S. and abroad. In the
U.S., there has been a continuing trend toward more stringent FDA requirements in the areas of
product approval and enforcement, causing medical device and biologics manufacturers to experience
longer research and development timelines, longer approval cycles, greater risk and uncertainty,
and higher expenses. Internationally, there is a risk that we may not be successful in meeting the
quality standards or other certification requirements. Even if regulatory approval of a product is
granted, such approval may entail limitations on uses for which the product may be labeled and
promoted or stringent post-marketing requirements, or may prevent us from broadening the uses of
our current products for different applications. If we incur significant unanticipated expenses
(for example, in connection with post-market patient monitoring and data collection activities for
our MemoryGel™ breast implants), it could have a material adverse effect on our results
of operations. In addition, to the extent permissible by law, we may not receive governmental
approval to export our products in the future, and countries to which products are to be exported
may not approve them for import. We may also be required to withdraw or recall our products after
we receive approvals and begin commercial sales if we, the FDA or a foreign government agency
determines that there is a higher than average incidence of post-treatment complications with our
products as a result of subsequent clinical experience and/or data. From time to time, we are
subject to inquiry by government agencies in this regard.
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Our manufacturing facilities and the manufacturing facilities of our third-party suppliers are also
subject to continual governmental review and inspection. The FDA has stated publicly that
compliance with manufacturing regulations will be scrutinized strictly. A governmental authority
may challenge our compliance with applicable federal, state and/or foreign regulations. In
addition, any discovery of previously unknown problems with one of our products or facilities may
result in restrictions on the product or the facility, including, but not limited to, product
recalls, withdrawal of the product from the market or other enforcement actions.
From time to time, legislative or regulatory proposals are introduced that, if implemented, could
alter the review and approval process relating to medical devices, biologics, or related to the
sale of our products. It is possible that the FDA or other governmental authorities will issue
additional regulations, which could further reduce or restrict the sales of either our presently
marketed products or products under development.
Any change in legislation or regulations that govern the review and approval process relating to
our current and/or future products or restrict the manner by which we may sell our products could
make it more difficult and/or costly to obtain approval for new products, and/or to produce,
market, and distribute existing products.
If we are unable to continue to develop and commercialize new technologies and products, we may
experience a decrease in demand for our products, or our products could become obsolete.
The medical device and biologics industries are highly competitive and are subject to significant
and rapid technological change. We believe that our ability to develop or acquire new technologies
and products is crucial to our success. We are continually engaged in product research and
development, product improvement programs, and required clinical studies to develop new
technologies and to maintain and improve our competitive position. Any significant delays in the
above or termination or failure of our clinical trials would materially and adversely affect our
research, development, and commercialization timelines. We cannot guarantee that we will be
successful in enhancing existing products or in developing or acquiring new products or
technologies that will timely achieve regulatory approval or success in the marketplace.
There is also a risk that our products may not gain market acceptance among physicians, patients
and the medical community generally. The degree of market acceptance of any medical device or
other product that we develop will depend on a number of factors, including demonstrated clinical
safety and efficacy, cost-effectiveness, potential advantages over alternative products,
user/patient acceptance, and our marketing and distribution capabilities. Physicians will not
recommend our products if clinical and/or other data and/or other factors do not demonstrate their
safety and efficacy compared to competing products, or if our products do not best meet the needs
of the individual patient. If our new products do not achieve significant market acceptance, our
sales and income may not grow as much as expected, or may even decline.
In January 2007, we filed the second module of the Puragen™ hyaluronic acid dermal
filler PMA. Any delays in the submission of the additional modules, or a delay or denial by the
FDA, would have a material adverse effect on our commercialization timelines and competitive
position with respect to this product and, ultimately, our future sales and operating results.
If we are unable to compete effectively with existing or new competitors, we could experience price
reductions, reduced demand for our products, reduced margins and loss of market share, and our
business, results of operations, and financial condition would be adversely affected.
Our products compete with other competitive medical products manufactured by major companies and
may face future competition from new products currently under development by others.
Competition in our industry occurs on a variety of levels, including but not limited to the
following:
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developing and bringing new products to market before others or providing
benefits superior to those of existing products; |
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developing new technologies to improve existing products; |
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developing new products at a lower cost to provide the same benefits as
existing products at the same or lower price; |
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creating or entering new markets with existing products; |
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increasing or improving service-related programs; and |
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advertising in a manner that creates additional awareness and demand. |
The competitive environment requires an ongoing, extensive search for technological innovations and
the ability to market products effectively. Consequently, we must continue to effectively execute
on various competitive levels to properly position our products in the marketplace and maintain our
market share, sales and gross margins.
In particular, we face competition from Allergan, Inc., which in March 2006 acquired Inamed
Corporation, our then largest competitor in the U.S. for our breast aesthetics product line. As a
result of Allergan’s acquisition of Inamed, we are now competing against a much larger company.
Outside the U.S., we compete with Allergan and various smaller competitors. Notwithstanding
relative sizes, some of the smaller competitors have strong market positions in their home markets,
which increases the challenges associated with maintaining and growing our international business.
If we suffer negative publicity concerning the safety of our products, our sales may be harmed and
we may be forced to withdraw products.
Physicians and potential patients may have a number of concerns about the safety of our products,
including our breast implants, whether or not such concerns have a basis in generally accepted
science or peer-reviewed scientific research. Negative publicity, whether accurate or inaccurate,
concerning our products could reduce market or governmental acceptance of our products, delay
product approvals, or result in decreased product demand or product withdrawal. For example, we
may be required to recall or withdraw our products if we, the FDA, or a foreign government agency
determine that use of our products results in a higher-than-average rate of post-treatment
complications based on clinical experience and/or data. If one foreign government agency were to
request or require a withdrawal or recall of one or more of our products, the safety concerns
leading to that government agency’s request may be investigated by regulatory bodies in other
countries, which could result in additional withdrawals or recalls as well as negative publicity
regarding our products. In addition, significant negative publicity could result in an increased
number of product liability claims, whether or not these claims are supported by applicable law.
If changes in the economy and consumer spending reduce consumer demand for our products, our sales
and profitability could suffer.
Certain elective procedures, such as breast augmentation, body contouring and facial injections,
which comprise the majority of our revenues, are not covered by insurance. Adverse changes in the
economy or other conditions or events may have an adverse effect on consumer spending, cause
consumers to reassess their spending choices, and reduce the demand for these surgeries. Any such
changes, conditions or events could have an adverse effect on our sales and results of operations.
If we are unable to implement new information technology systems or upgrade existing systems, our
ability to manufacture and sell products, maintain regulatory compliance, and manage and report our
business activities may be impaired, delayed, or diminished, which would cause substantial business
interruption and loss of sales, customers, and profits.
We have implemented multiple information technology systems throughout our operations, including an
enterprise resource planning system which is our primary business management system, and are
constantly in the process of upgrading these systems to current version releases. We intend to
continue to implement these systems, as appropriate, for all of our businesses worldwide. Many
other companies have had severe problems with computer system implementations. With regard to all
of our information technology system implementations and upgrades, we
use controlled project plans, and we believe we have assigned adequate staffing and other resources
to the projects to ensure its successful integration; however, there is no assurance that the
system designs will meet our current and future business needs or that they will operate as
designed. We are heavily dependent on such information technology systems, and any failure or
delay in the system implementation or upgrades would cause a substantial interruption to our
business, may create additional expense, and could adversely effect sales, customer relations and
results of operations.
21
If we are unable to acquire companies, businesses or technologies as part of our growth strategy or
to successfully integrate past acquisitions, our growth, sales, and profitability could suffer.
A significant portion of our historic growth has been the result of acquisitions of other
companies, businesses and technologies. In October 2005, we announced our intention to refocus our
business solely on aesthetic medicine and in June 2006, we sold our surgical urology and clinical
and consumer health businesses. This refocus consumed a significant amount of management attention
and may have distracted us from pursuing acquisition opportunities in the short term. We intend to
continue acquiring other businesses and technologies to facilitate our future business strategies.
There can be no assurance that we will be able to identify appropriate acquisition candidates,
consummate transactions, or obtain agreements with terms favorable to us. Once a business is
acquired, any inability to integrate the business, failure to retain and develop its workforce, or
establish and maintain appropriate communications, performance expectations, regulatory compliance
procedures, accounting controls, and reporting procedures could adversely affect our future sales
and results of operations.
We agreed to indemnify Coloplast against specified losses in connection with Coloplast’s purchase
of our Urology Business, and any demands for indemnification may result in expenses we do not
anticipate and distract the attention of our management from our continuing businesses.
We agreed to indemnify Coloplast against specified losses in connection with the June 2006 sale of
our urology business and generally retain responsibility for various legal liabilities that accrued
prior to closing. We also made representations and warranties to Coloplast about the condition of
our urology business, including matters relating to intellectual property, regulatory compliance
and environmental laws. If Coloplast makes an indemnification claim because it has suffered a loss
or a third party has commenced an action against Coloplast, we may incur substantial expenses
resolving Coloplast’s claim or defending Coloplast and ourselves against the third party action,
which would harm our operating results. In addition, our ability to defend ourselves may be
impaired because our former urology business employees are now employees of Coloplast or other
companies, and our management may have to devote a substantial amount of time to resolving the
claim. In addition, these indemnity claims may divert management attention from aesthetics
business. It may also be difficult to determine whether a claim from a third party stemmed from
actions taken by us or Coloplast, and we may expend substantial resources trying to determine which
party has responsibility for the claim.
We may not realize some of the benefits of the Coloplast transaction.
While Coloplast has agreed to indemnify us for the availability of up to $7.1 million of these tax
credits, we cannot be sure that we will be able to utilize those tax credits before they expire due
to any number of factors including, but not limited to, changes in ownership in excess of the
applicable tax rules, sufficient income in the jurisdictions in which we have the credits, and
other possible reasons the tax credits might be disallowed. If the foreign tax credits are
disallowed and we are not able to recover from Coloplast, we may not be able to realize the full
amount, or any, of those tax credits.
We depend upon our key personnel and our ability to attract, train, and retain employees.
Our success depends significantly on the continued individual and collective contributions of our
senior management team. Our future success depends on our ability to hire, train, and retain
skilled employees. Competition for such employees is intense. The loss of the services of any
member of our senior management or the inability to hire and retain experienced management
personnel could adversely affect our ability to execute our business plan and harm our operating
results.
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State legislatures and taxing authorities may create new laws or change their interpretation of
existing state and local tax laws that may affect future product demand or create unforeseen tax
liabilities.
If any state legislature or other government authority creates new laws to assess sales taxes on
medical procedures or products determined by them to be cosmetic, our physician and patient
customers may have to pay more for our products and future demand may decrease. In addition,
taxing authorities may determine that our products are not eligible for exemptions and are thus
taxable based on their interpretations of existing tax laws. Such taxing authorities may then
determine that we owe additional taxes, penalties, and interest related to product sales from prior
periods. These determinations would have a negative effect on our results of operations.
If our intellectual property rights do not adequately protect our products or technologies, others
could compete against us more directly, which would hurt our profitability.
Our success depends in part on our ability to obtain patents or rights to patents, protect trade
secrets, operate without infringing upon the proprietary rights of others, and prevent others from
infringing on our patents, trademarks, and other intellectual property rights. We will be able to
protect our intellectual property from unauthorized use by third parties only to the extent that it
is covered by valid and enforceable patents, trademarks, or licenses. Patent protection generally
involves complex legal and factual questions and, therefore, enforceability of patent rights cannot
be predicted with certainty; thus, any patents that we own or license from others may not provide
us with adequate protection against competitors. Moreover, the laws of certain foreign countries
do not recognize intellectual property rights or protect them to the same extent as do the laws of
the United States.
In addition to patents and trademarks, we rely on trade secrets and proprietary know-how. We seek
protection of these rights, in part, through confidentiality and proprietary information
agreements. These agreements may not provide sufficient protection or adequate remedies for
violation of our rights in the event of unauthorized use or disclosure of confidential and
proprietary information. Failure to protect our proprietary rights could seriously impair our
competitive position.
If third parties claim we are infringing their intellectual property rights, we could suffer
significant litigation, indemnification, or licensing expenses or be prevented from marketing our
products.
Our commercial success depends significantly on our ability to operate without infringing the
patents and other proprietary rights of others. However, regardless of our intent, our current or
future technologies of our existing operations or those current technologies of our discontinued
operations, may infringe the patents or violate other proprietary rights of third parties. In the
event of such infringement or violation we may face expensive litigation or indemnification
obligations and may be prevented from selling existing products and pursuing product development or
commercialization.
We depend on the continued use of our manufacturing plants and on single and sole source suppliers
for certain raw materials and licensed or manufactured products, and the loss of, or disruption to,
any plant or supplier could adversely affect our ability to manufacture or sell many of our
products.
Significant damage to or the loss of our manufacturing facilities could adversely affect our
ability to manufacture and/or sell many of our products. In addition, we currently rely on single
or sole source suppliers for raw materials used in many of our products, including silicone. The
manufacturing of our products is complex and highly regulated, and any changes to our products may
result in delays or disruptions of our manufacturing capacity or the manufacturing capacity of our
third-party suppliers. In the event that our manufacturing plants or third-party suppliers cannot
meet our requirements, we cannot guarantee that we would be able to produce enough manufactured
goods or obtain a sufficient amount of quality raw materials from other suppliers in a timely
manner. We also depend on third-party manufacturers and suppliers for components and licensed
products. In connection with the sale of our urology business to Coloplast, we have entered into a
supply agreement with Coloplast for certain components of our breast aesthetic products and
Coloplast is our sole source for these components, and if we were unable to obtain the supply, our
business would be harmed. We may determine that we do not want to continue to purchase products
from Coloplast, or Coloplast may be unable to meet our needs in a timely manner,
either of which may disrupt our business during the period we negotiate a supply agreement with and
qualify the manufacturing process of a third party or begin production of the components ourselves.
In addition, we depend on
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Genzyme for the supply of hyaluronic acid dermal filler products we
distribute outside of the United States, Tutogen Medical, Inc. for the supply of
NeoForm™, a human tissue product used in breast reconstruction procedures, and Niadyne,
Inc. for the supply of NIA-24, and if we were no longer able to satisfy demand for these products
through our relationships with Genzyme, Tutogen Medical and Niadyne, respectively, our business
could be harmed. In addition, in the future we will depend on Genzyme for the supply of
Puragen™. If there is a disruption in the supply of any of these single or sole source
products, our future sales and results of operations would be adversely affected.
Our international business exposes us to a number of risks.
More than one-quarter of our sales for our continuing operations are derived from international
operations. Accordingly, any material decrease in foreign sales would have a material adverse
effect on our overall sales and results of operations. Most of our international sales are
denominated in Euros, British Pounds, Canadian dollars or U.S. dollars. Depreciation or
devaluation of the local currencies of countries where we sell our products may result in our
products becoming more expensive in local currency terms, thus reducing demand, which could have an
adverse effect on our operating results. Our international operations and financial results may be
adversely affected by other factors, including the following:
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foreign government regulation of medical products; |
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product liability, intellectual property and other claims; |
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new U.S. export or local market import license requirements; |
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political or economic instability in our target markets; |
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trade restrictions; |
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changes in tax laws and tariffs; |
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managing foreign distributors and manufacturers; |
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managing foreign branch offices and staffing; and |
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competition. |
Health care reimbursement or reform legislation could materially affect our business.
If any national health care reform or other legislation or regulations are passed that impose
limits on the amount of reimbursement for certain types of medical procedures or products, or on
the number or type of medical procedures that may be performed, or that has the effect of
restricting a physician’s ability to select specific products for use in patient procedures, such
changes could have a material adverse effect on the demand for our products. Our revenues
partially depend on U.S. and foreign government health care programs and private health insurers
reimbursing patients’ medical expenses. Physicians, hospitals, and other health care providers may
not purchase our products if they do not receive satisfactory reimbursement from these third-party
payers for the cost of procedures using our products. In the U.S., there have been, and we expect
that there will continue to be, a number of federal and state legislative and regulatory proposals
to implement greater governmental control over the healthcare industry and its related costs.
These proposals create uncertainty as to the future of our industry and may have a material adverse
effect on our ability to raise capital or to form collaborations. In a number of foreign markets,
the pricing and profitability of healthcare products are subject to governmental influence or
control. In addition, legislation or regulations that impose restrictions on the price that may be
charged for healthcare products or medical devices may adversely affect our sales and results of
operations.
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If our use of hazardous materials results in contamination or injury, we could suffer significant
financial loss.
We are subject to federal, state, local and foreign environmental laws and regulations. Our
manufacturing and research and development activities involve the controlled use and disposal of
potentially hazardous materials, chemicals and biological materials, which require compliance with
various laws and regulations regarding the use, storage, and disposal of such materials. We
believe our continuing and discontinued operations comply in all material respects with applicable
environmental laws and regulations in each country where we have a business presence. Although we
continue to make expenditures for environmental protection, we do not anticipate any additional
significant expenditures, in complying with such laws and regulations, that would have a material
impact on our results of operations or competitive position. We are not aware of any pending
litigation or significant financial obligations arising from current or past environmental
practices that are likely to have a material adverse effect on our financial position. We cannot
assure, however, that environmental claims or indemnification obligations relating to our
continuing or discontinued operations or properties currently or previously owned or operated by us
will not develop in the future, nor can we predict whether any such claims, if they were to
develop, would require significant expenditures on our part. We cannot eliminate the risk of
accidental contamination or injury from these materials. In the event of an accident or
environmental discharge, we may be held liable for any resulting damages, which may exceed our
financial resources and any applicable insurance coverage. In addition, we are unable to predict
what legislation or regulations may be adopted or enacted in the future with respect to
environmental protection and waste disposal.
In the U.S., each of our domestic manufacturing facilities are subject to regulation by the United
States Environmental Protection Agency and other state and local environmental agencies. For
example, in Texas, we are subject to regulation by the local Air Pollution Control District as a
result of some of the chemicals used in our manufacturing processes. In our Wisconsin facility, we
are also subject to regulation by the U.S. Department of Health and Human Services, Centers for
Disease Control due to the nature of the biological agent used to manufacture our botulinum toxin
product, Clostridium botulinum type A, which is still in the development phase. Prior to the June
2, 2006 Coloplast transaction, we were also subject to regulation by the United States Nuclear
Regulatory Commission in our Oklahoma facility due to the manufacture and distribution of
brachytherapy seeds using radioactive iodine I-125 and palladium Pd-103. We may have continuing
liability for any violations that arose prior to the Coloplast transaction.
In Europe, each of our manufacturing facilities is subject to regulation by country-specific
environmental protection agencies. For example, in Leiden, as a result of some of the chemicals
and other materials used in our manufacturing processes, we are subject to regulation by Dutch law
on environmental control and the Dutch emission guidelines (“NeR”) that regulate the exhaust of
certain chemicals and hazardous waste regulations. In our Scottish facility, we are subject to
regulation by the Scottish Environmental Protection Agency (SEPA).
Failure to comply with the regulations and requirements of these various agencies could affect our
ability to manufacture products and may have a significant negative impact on sales and results of
operations.
Future changes in financial accounting standards may cause adverse unexpected revenue or expense
fluctuations and affect our reported results of operations.
A change in accounting standards could have a significant effect on our reported results and may
even affect our reporting of transactions completed before the change is effective. New
pronouncements and varying interpretations of existing pronouncements have occurred and may occur
in the future. Changes to existing rules or current practices may adversely affect our reported
financial results and require restatement of previously issued results for retroactive application
of the new accounting standard.
Hedging transactions and other transactions may affect the value of the notes.
In connection with the original issuance of our 23/4% convertible subordinated notes in December
2003, we entered into convertible note hedge and warrant transactions with respect to our common
stock with Credit Suisse First Boston International (an affiliate of Credit Suisse First Boston
LLC), the initial purchaser of the notes, to reduce the potential dilution from conversion of the
notes up to a price of our common stock (approximately $39.15 per share at
the current warrant strike price). In connection with these hedging arrangements, Credit Suisse
First Boston International and/or its affiliates has taken, and we expect will continue to take,
positions in our common stock in secondary market transactions and/or will enter into various
derivative transactions. Such hedging arrangements could adversely affect the market price of our
common stock. In addition, the existence of the notes may encourage market participants to short
sell our common stock because the conversion of the notes could depress the price of our common
stock.
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Litigation may harm our business or otherwise distract our management.
Substantial, complex or extended litigation could cause us to incur large expenditures and distract
our management, and could result in significant monetary or equitable judgments against us. For
example, lawsuits by employees (former or current), patients, customers, licensors, licensees,
suppliers, business partners, distributors, shareholders, or competitors could be very costly and
could substantially disrupt our business. Occasional disputes with such companies or individuals
are not uncommon, and we cannot assure that we will always be able to resolve such disputes out of
court or on terms favorable to us.
Our publicly filed SEC reports are reviewed by the SEC from time to time and any significant
changes required as a result of any such review may result in material liability to us and have a
material adverse impact on the trading price of our common stock.
The reports of publicly traded companies are subject to review by the SEC from time to time for the
purpose of assisting companies in complying with applicable disclosure requirements and to enhance
the overall effectiveness of companies’ public filings, and comprehensive reviews by the SEC of
such reports are now required at least every three years under the Sarbanes-Oxley Act of 2002. SEC
reviews often occur at the time companies file registration statements such as the registration
statement we filed in connection with our convertible note offering, but the SEC may also initiate
reviews at any time. While we believe that our previously filed SEC reports comply, and we intend
that all future reports will comply, in all material respects with the published rules and
regulations of the SEC, we could be required to modify or reformulate information contained in
prior filings as a result of an SEC review. Any modification or reformulation of information
contained in such reports could be significant and result in material liability to us and have a
material adverse impact on the trading price of our securities, including our common stock or our
convertible notes.
Our operating results may fluctuate substantially and could precipitate unexpected movement in the
price of our common stock and convertible notes.
Our common stock trades on the New York Stock Exchange under the symbol “MNT.” On March 30, 2007,
the closing price of our common stock on the New York Stock Exchange was $46.00 per share. On
December 22, 2003, we completed an offering of $150 million of convertible subordinated notes
(“notes”) due January 1, 2024 pursuant to Rule 144A under the Securities Act of 1933. The notes
bear interest at 23/4% per annum, are convertible into shares of our common stock at an adjusted
conversion price of $29.079 per share and are subordinated to all existing and future senior debt.
The market prices of our stock and convertible securities are subject to significant fluctuations
in response to the factors such as the ones set forth above, many of which are beyond our control
including such factors as changes in pricing policies by our competitors and the timing of
significant orders and shipments.
Such factors, as well as other economic conditions, may adversely affect the market price of our
securities, including our common stock and convertible notes. There could be periods in which we
experience shortfalls in revenue and/or earnings, or fail to achieve our financial guidance, or
provide guidance that is different from levels expected by securities analysts and investors, which
could have an immediate and significant adverse effect on the trading price of our securities,
including our common stock and our convertible notes.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
26
ITEM 2. PROPERTIES.
We own and lease the following facilities:
| |
|
|
|
|
|
|
| Location |
|
Total Sq. Ft. |
|
|
Principal Segment and Use |
Owned Properties |
|
|
|
|
|
|
Netherlands |
|
|
65,000 |
|
|
Manufacturing, warehousing and administrative offices |
|
|
|
|
|
|
|
Minnesota |
|
|
20,000 |
|
|
Manufacturing, warehousing |
|
|
|
|
|
|
|
|
|
85,000 |
|
|
|
|
|
|
|
|
|
|
Leased Properties |
|
|
|
|
|
|
Texas |
|
|
149,000 |
|
|
Manufacturing, warehousing and administrative offices |
|
|
|
|
|
|
|
California |
|
|
127,000 |
|
|
Corporate offices, research and development, and sales and marketing |
|
|
|
|
|
|
|
Arizona |
|
|
32,000 |
|
|
Manufacturing, warehousing and administrative offices |
|
|
|
|
|
|
|
United Kingdom |
|
|
23,000 |
|
|
Manufacturing, warehousing and administrative offices |
|
|
|
|
|
|
|
Canada |
|
|
11,000 |
|
|
Sales, warehousing and administrative offices |
|
|
|
|
|
|
|
Wisconsin |
|
|
10,000 |
|
|
Research and development |
|
|
|
|
|
|
|
|
|
352,000 |
|
|
|
Our property in The Netherlands is pledged as collateral on borrowings under a Loan and Overdraft
Facility with Cooperative RaboBank Leiden. See “Liquidity and Capital Resources” under Item 7A –
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” for
additional information. Our leases have terms ranging from 1 to 15 years, many of which have
options to renew on terms we consider favorable. In addition to the facilities mentioned above, we
have international sales offices throughout five countries where we lease office and warehouse space
ranging from 2,000 to 8,000 square feet. We anticipate that we will be able to extend or renew the
leases that expire in the near future on terms satisfactory to us, or if necessary, locate
substitute or additional facilities on acceptable terms.
We believe our facilities are generally suitable and adequate to accommodate our current
operations and additional suitable facilities are readily available to accommodate future expansion
as necessary.
For information regarding lease obligations see Note M “Commitments” under “Notes to the
Consolidated Financial Statements.”
27
ITEM 3. LEGAL PROCEEDINGS.
On March 4, 2004, John H. Alico, et. al., d/b/a PTF Royalty Partnership (“PTF”) filed a lawsuit
against us in the Business Litigation Session of the Superior Court of Massachusetts, Suffolk
County in which PTF alleged, among other things, breach of a merger agreement that involved our
acquisition of Mentor O&O, Inc. (“O&O”), an unrelated entity at that time, which was dated as of
March 14, 1990 (“Merger Agreement”) (prior to the merger, O&O had no affiliation with us). PTF
alleged that we breached the terms of the Merger Agreement by failing to exert commercially
reasonable and diligent efforts to obtain approval by the FDA for a product used for the treatment
of urinary incontinence and by failing to accurately account for and pay royalties due thereunder.
PTF sought damages in excess of $18 million, which was the maximum amount of royalties PTF could
have received under the Merger Agreement. On January 26, 2007, the parties entered into a
confidential settlement agreement and mutual release and the action was formally dismissed on
January 29, 2007.
In addition, in the ordinary course of our business we experience other varied types of claims that
sometimes result in litigation or other legal proceedings. Although there can be no certainty, we
do not anticipate that any of these proceedings will have a material adverse effect on us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted for a vote of our shareholders during the fourth quarter of the fiscal
year ended March 31, 2007.
PART II
|
|
|
| ITEM 5. |
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Our common stock trades on the New York Stock Exchange under the symbol “MNT”. The high and low
quarterly closing sales prices of our common stock, as reported by the NYSE for the two most recent
fiscal years are set forth below.
| |
|
|
|
|
|
|
|
|
| Year Ended March 31, 2007 |
|
High |
|
|
Low |
|
Quarter ended March 31, 2007 |
|
$ |
53.21 |
|
|
$ |
45.97 |
|
Quarter ended December 31, 2006 |
|
$ |
53.67 |
|
|
$ |
45.03 |
|
Quarter ended September 30, 2006 |
|
$ |
50.72 |
|
|
$ |
40.70 |
|
Quarter ended June 30, 2006 |
|
$ |
44.70 |
|
|
$ |
38.02 |
|
| |
|
|
|
|
|
|
|
|
| Year Ended March 31, 2006 |
|
High |
|
|
Low |
|
Quarter ended March 31, 2006 |
|
$ |
49.20 |
|
|
$ |
41.60 |
|
Quarter ended December 31, 2005 |
|
$ |
56.14 |
|
|
$ |
43.54 |
|
Quarter ended September 30, 2005 |
|
$ |
55.99 |
|
|
$ |
41.21 |
|
Quarter ended June 30, 2005 |
|
$ |
43.03 |
|
|
$ |
31.90 |
|
The closing sales price of our common stock as of May 23, 2007, was $40.61 per share. According to
the records of our transfer agent, there were approximately 800 holders of record of our common
stock on May 23, 2007. However, the majority of shares are held by brokers and other institutions
on behalf of shareholders.
28
Dividend Policy
We periodically declare cash dividends on our common stock. It is our intent to continue to pay
dividends for the foreseeable future subject to, among other things, Board approval, cash
availability, limitations under our existing credit facility, and alternative cash needs. Our
current credit agreement, as recently amended, limits the aggregate amount of dividends payable in
any fiscal year to $0.90 per share.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarterly Cash Dividends Declared |
|
| |
|
Year Ended March 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
First Quarter |
|
$ |
0.18 |
|
|
$ |
0.17 |
|
|
$ |
0.15 |
|
Second Quarter |
|
|
0.18 |
|
|
|
0.18 |
|
|
|
0.17 |
|
Third Quarter |
|
|
0.18 |
|
|
|
0.18 |
|
|
|
0.17 |
|
Fourth Quarter |
|
|
0.20 |
|
|
|
0.18 |
|
|
|
0.17 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0.74 |
|
|
$ |
0.71 |
|
|
$ |
0.66 |
|
|
|
|
|
|
|
|
|
|
|
Issuer Purchases of Equity Securities
Our Board of Directors has authorized a stock repurchase program, primarily to offset the dilutive
effect of our employee stock option plans, to provide liquidity to the market and to reduce the
overall number of shares outstanding. All shares repurchased under the program are retired and are
no longer deemed to be outstanding. The timing of repurchases is subject to market conditions,
cash availability and the terms of stock purchase plans, if any.
On June 16, 2006 we entered into a stock purchase plan with Citigroup Global Markets Inc. for the
purpose of repurchasing up to 5 million shares of our common stock, up to a cumulative purchase
price of $166 million, under a Rule 10b5-1 Plan (the “10b5 Plan”) compliant with Rule 10b-18. The
10b5 Plan will terminate on August 10, 2007, unless terminated earlier pursuant to the plan. In
connection with the entry into the 10b5 Plan, our Board of Directors increased the authorized
number of shares available for repurchase pursuant to our stock repurchase program from 3.3 million
to 5 million shares. The timing of purchases and the exact number of shares to be purchased
depends on market conditions. As of March 31, 2007, 175,100
shares of our common stock had been
purchased under the 10b5 Plan for a total purchase price of $8.2 million. The repurchase program
and the 10b5 Plan may be suspended or discontinued at any time. On March 30, 2007, we amended our
Credit Agreement again to allow for the repurchase of up to $400 million of our common stock after
March 30, 2007. The table below sets forth certain share repurchase information for the quarter
ended March 31, 2007. As of May 23, 2007, during fiscal 2008 an additional 2.7 million shares had
been repurchased at an average purchase price of $40.34 per share.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ISSUER PURCHASES OF EQUITY SECURITIES |
|
| |
|
|
|
|
|
|
|
|
|
Total Number |
|
|
Maximum Number |
|
| |
|
|
|
|
|
|
|
|
|
of Shares |
|
|
of Shares that May |
|
| |
|
Total Number |
|
|
|
|
|
|
Purchased as |
|
|
Yet Be Purchased |
|
| (in thousands |
|
of Shares |
|
|
Average Price |
|
|
Part of Publicly |
|
|
Under the Plans |
|
| except per share amounts) |
|
Purchased |
|
|
Paid per Share |
|
|
Announced Plans |
|
|
or Programs |
|
January 1 – January 31, 2007 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
4,913 |
|
February 1 – February 28, 2007 |
|
|
0.1 |
|
|
|
47.45 |
|
|
|
0.1 |
|
|
|
4,913 |
|
March 1 – March 31, 2007 |
|
|
103.4 |
|
|
|
46.64 |
|
|
|
103.4 |
|
|
|
4,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
103.5 |
|
|
$ |
46.64 |
|
|
|
103.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
During the period, 103,500 shares were purchased under the 10b5 Plan. |
| |
| (2) |
|
In the first quarter of fiscal 1996, our Board of Directors authorized an ongoing stock repurchase program. The
initial authorization was for the repurchase of up to one million shares. Subsequently, the Board of Directors has
authorized the repurchase of an additional 26.0 million shares, including 1.7 million and 5.0 million shares in June 2006
and March 2006, respectively. These share amounts have been adjusted for the two-for-one stock split affected December
2002. |
| |
| (3) |
|
We have not set a date for the stock repurchase program to expire. |
29
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial information presented below is obtained from our audited
consolidated financial statements for each of the five fiscal years
ending March 31, 2007. As a result of the sale of our Urology
Business on June 2, 2006, operations, assets and liabilities
associated with the Urology Business have been segregated from
continuing operations and are reported as discontinued operations. This
selected financial data should be read together with our consolidated financial statements and
related notes, as well as the discussion under the caption “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, |
|
| (in thousands, except per share data) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Statement of Income Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
301,974 |
|
|
$ |
268,272 |
|
|
$ |
251,726 |
|
|
$ |
218,437 |
|
|
$ |
191,404 |
|
Gross profit |
|
|
223,318 |
|
|
|
199,063 |
|
|
|
187,150 |
|
|
|
157,854 |
|
|
|
137,544 |
|
Operating income from continuing operations(1) |
|
|
65,629 |
|
|
|
69,065 |
|
|
|
65,381 |
|
|
|
66,206 |
|
|
|
57,506 |
|
Income before income taxes -
continuing operations |
|
|
82,172 |
|
|
|
67,685 |
|
|
|
62,745 |
|
|
|
67,251 |
|
|
|
59,066 |
|
Income taxes — continuing operations |
|
|
24,548 |
|
|
|
19,606 |
|
|
|
19,937 |
|
|
|
21,479 |
|
|
|
17,186 |
|
Income from continuing operations |
|
|
57,624 |
|
|
|
48,079 |
|
|
|
42,808 |
|
|
|
45,772 |
|
|
|
41,880 |
|
Discontinued operations, net of income tax(2) |
|
|
232,990 |
|
|
|
14,278 |
|
|
|
12,073 |
|
|
|
9,007 |
|
|
|
13,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
290,614 |
|
|
$ |
62,357 |
|
|
$ |
54,881 |
|
|
$ |
54,779 |
|
|
$ |
55,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
1.37 |
|
|
$ |
1.12 |
|
|
$ |
1.02 |
|
|
$ |
1.00 |
|
|
$ |
0.90 |
|
Discontinued operations(2) |
|
$ |
5.55 |
|
|
$ |
0.33 |
|
|
$ |
0.29 |
|
|
$ |
0.20 |
|
|
$ |
0.30 |
|
Basic earnings per share |
|
$ |
6.93 |
|
|
$ |
1.45 |
|
|
$ |
1.31 |
|
|
$ |
1.20 |
|
|
$ |
1.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
1.24 |
|
|
$ |
1.01 |
|
|
$ |
0.93 |
|
|
$ |
0.95 |
|
|
$ |
0.86 |
|
Discontinued operations(2) |
|
$ |
4.75 |
|
|
$ |
0.28 |
|
|
$ |
0.24 |
|
|
$ |
0.18 |
|
|
$ |
0.29 |
|
Diluted earnings per share |
|
$ |
5.99 |
|
|
$ |
1.29 |
|
|
$ |
1.17 |
|
|
$ |
1.13 |
|
|
$ |
1.15 |
|
| |
Dividends per common share |
|
$ |
0.74 |
|
|
$ |
0.71 |
|
|
$ |
0.66 |
|
|
$ |
0.47 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
41,960 |
|
|
|
42,995 |
|
|
|
41,921 |
|
|
|
45,543 |
|
|
|
46,428 |
|
Diluted |
|
|
49,092 |
|
|
|
50,870 |
|
|
|
49,667 |
|
|
|
49,272 |
(3) |
|
|
48,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (continuing operations): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital(4) |
|
$ |
524,649 |
|
|
$ |
201,625 |
|
|
$ |
148,434 |
|
|
$ |
149,981 |
|
|
$ |
134,863 |
|
Total assets(4) |
|
|
709,768 |
|
|
|
391,771 |
|
|
|
311,962 |
|
|
|
312,236 |
|
|
|
241,480 |
|
Long-term accrued liabilities, less current
portion |
|
|
12,169 |
|
|
|
10,590 |
|
|
|
15,385 |
|
|
|
13,597 |
|
|
|
10,777 |
|
Convertible subordinated notes |
|
|
150,000 |
|
|
|
150,000 |
|
|
|
150,000 |
|
|
|
150,000 |
|
|
|
— |
|
Shareholders’ equity |
|
$ |
434,868 |
|
|
$ |
226,589 |
|
|
$ |
172,527 |
|
|
$ |
196,004 |
|
|
$ |
276,136 |
|
|
|
|
| (1) |
|
In fiscal years 2007 and 2006, we recorded charges of $11.0 million and $1.5
million related to stock compensation, respectively. In addition, we reported impairment and
restructuring charges of $2.6 million and $1.7 million in fiscal 2007 and 2005, respectively.
In fiscal 2005, we reported $8.5 million in severance costs. |
| |
| (2) |
|
In June 2006, we sold our surgical urology and clinical and consumer
healthcare businesses. As a result, the operations for these former businesses have been
reflected as discontinued operations for all prior periods. See “Note S – Discontinued
Operations” in the “Notes to the Consolidated Financial Statements.” |
| |
| (3) |
|
Per share amounts and diluted shares outstanding for fiscal 2004 have been
restated to reflect the additional shares that would be issued upon conversion of our 23/4%
convertible notes, in accordance with the adoption of Emerging Issues Task Force (EITF) Issue
No. 04-8 in the quarter ended December 2004. |
| |
| (4) |
|
Fiscal 2006 has been restated to conform to current year presentation. |
30
|
|
|
| ITEM 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. |
The following discussion should be read together with our consolidated financial statements and
related notes, which are included in this report, and the information in the “Item 1A. Risk
Factors” section of this report.
OVERVIEW
We develop, manufacture, license and market a range of products serving the aesthetic market,
including plastic and reconstructive surgery. Our products include breast implants for plastic and
reconstructive surgery, capital equipment and consumables used for soft tissue aspiration for body
contouring (liposuction), and facial aesthetics products. Historically, we operated in three
reportable segments: aesthetic and general surgery, surgical urology, and clinical and consumer
healthcare. In June 2006, we sold the surgical urology and clinical and consumer healthcare
businesses (collectively, the Urology Business).
We are headquartered in Santa Barbara, California, with manufacturing and research operations in
the United States, The Netherlands and the United Kingdom and employ approximately 950 people
around the world. We also purchase finished products and certain raw material components from
third party manufacturers and suppliers. Our cost of goods sold represents raw materials, labor
and overhead, the cost of third party finished products, freight expense and the cost associated
with our product warranty programs. Gross margins may fluctuate from period to period due to a
variety of factors, including changes in the selling prices of our products, the mix of products
sold, changes in the cost of third party finished products, raw materials, labor and overhead,
fluctuations in foreign currency exchange rates, changes in warranty programs, amortization and
changes in manufacturing processes and yields.
In addition to our U.S. sales, we also sell most of our product lines outside the U.S., principally
to Canada, Western Europe, Central and South America, and the Pacific Rim. Products are sold
through our direct international sales offices in Canada, United Kingdom, Germany, Spain, Italy,
Australia and France, as well as through independent distributors in other countries. Our
manufactured products are mainly supplied by our plants in the U.S. and The Netherlands. Our
Netherlands plant serves our international branches and distributors. Our U.S. plant also serves
these markets in addition to the U.S. market.
We employ a direct sales force domestically for our aesthetic surgery and facial product lines, and
specialists to support our body contouring business. The sales force provides product information,
training and data support and related services to physicians, nurses and other health care
professionals. We promote our products through participation in and sponsorship of medical
conferences and educational seminars, specialized websites, journal advertising, direct mail
programs, and a variety of marketing support programs. In addition, we contribute to organizations
that provide counseling and education for persons suffering from certain conditions, and we provide
patient education materials for most of our products to physicians for use with their patients.
Our selling, general and administrative expense incorporates the expenses of our sales and
marketing organization and the general and administrative expenses necessary to support the global
organization. Our selling expenses consist primarily of salaries, commissions, and marketing
program costs. General and administrative expenses generally incorporate the costs of accounting,
human resources, information services, equity compensation expense, certain intangible
amortization, business development, legal and insurance costs.
Our research and development expenses are comprised of the following types of costs incurred in
performing clinical development and research and development activities: salaries and benefits,
allocated overhead, clinical trial and related clinical manufacturing costs, regulatory submission
costs, intellectual property procurement, contract services, and other outside costs. We also
conduct research on materials technology, manufacturing processes, product design and product
improvement options.
31
Urology Summary
In October 2005, we began to evaluate strategic alternatives for our surgical urology and clinical
and consumer healthcare businesses. On May 17, 2006, we entered into a definitive purchase
agreement to sell our Urology Business to Coloplast A/S (Coloplast) for total consideration of $463
million ($456 million in cash and the remainder consisting of an indemnification by Coloplast to
Mentor related to certain foreign tax credits that arose from the transaction). On June 2, 2006,
the sale of the Urology Business was completed. On June 1, 2006, our Porges SAS subsidiary sold
certain intellectual property to Coloplast for $52 million. The purchase price was subject to a post-closing adjustment based
on the working capital of the Urology Business as of the closing date, and a downward reduction in
an amount equal to 50% of the amount of certain transfer taxes and related fees incurred in
connection with the transaction, 50% of the cost of severance obligations in respect of certain
former employees of the Urology Business and certain other administrative costs. The post-closing
adjustment of $2.7 million was paid by us to Coloplast in the fourth quarter of fiscal 2007, reducing total
consideration to approximately $460 million.
The purchase agreement with Coloplast contains customary representations and warranties and
indemnification provisions whereby each party agrees to indemnify the other for breaches of
representations and warranties, breaches of covenants and other matters, with our liability for
breaches of representations and warranties generally limited to 15% of the purchase price.
Pursuant to the terms of the purchase agreement, an escrow fund was established with $10 million
withheld from the purchase price to secure our indemnification obligations with respect to any
breaches of our representations and warranties for a period of 18 months. In addition, the
purchase agreement provides that we will not enter into or engage in a business that competes with
the Urology Business, on a worldwide basis, for a period of seven years following the closing of
the transaction. These restrictions on competition do not apply to (i) the development,
manufacture or sale of any oral pharmaceuticals or any product or treatments involving dermal
fillers or other bulking agents or toxins, including botulinum toxins, or (ii) any business
acquired and operated by us or our affiliates for so long as any such businesses generate less than
$5 million in aggregate annual revenues from any competing business. These restrictions on
competition terminate upon a change in control of Mentor.
In
connection with the sale to Coloplast, we also entered into a
Transition Services Agreement (“TSA”) and
various supply agreements. Pursuant to the TSA, in exchange for
specified fees, we provided to Coloplast and Coloplast provided to us, services including
accounting, information technology, customer support and use of facilities. Under the supply
agreements we supply various products, including silicone gel-filled testicular implants to
Coloplast and Coloplast supplies us with components for the manufacture of our breast implants.
These services agreements are expected to extend through a period not to exceed twelve months and
the supply agreements range from a period of six to 36 months. These services and supply
agreements are not expected to have a significant impact on our future cash flows from continuing
operations. As of March 31, 2007, the majority of the services
under the TSA have been completed.
On June 2, 2006, we also completed the sale of our intellectual property, raw materials and
tangible assets for the production of silicone male external catheters relating to our catheter
production facility in Anoka, Minnesota and our inventory of such catheters to Rochester Medical
Corporation, for an aggregate purchase price of approximately $1.6 million.
As a result of the sale to Coloplast, the assets and liabilities related to the Urology Business
have been segregated from continuing operations and are reported as assets and liabilities of
discontinued operations in the accompanying consolidated balance sheets. In addition, operations
associated with the Urology Business have been classified as income from discontinued operations in
the accompanying consolidated statements of income. As a result of this sale, we are focused on
the aesthetic market. We intend to leverage our traditional strengths in plastic surgery and grow
our market presence in cosmetic dermatology.
32
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our
consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the reporting period. On an
on-going basis, we evaluate our estimates and judgments. We base our estimates and judgments on
historical experience and on various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies, among others, affect our more significant
judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We recognize product revenue, net of discounts, returns, and rebates in accordance with Statement
of Financial Accounting Standards (“SFAS”) No. 48, “Revenue Recognition When the Right of Return
Exists,” and Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.”
As required by these standards, revenue is recorded when persuasive evidence of a sales arrangement
exists, delivery has occurred, the buyer’s price is fixed or determinable, contractual obligations
have been satisfied, and collectibility is reasonably assured. These requirements are met, and
sales and related cost of sales are recognized, upon the shipment of products, or in the case of
consignment inventories, upon the notification of usage by the customer. We record estimated
reductions to revenue for customer programs and other volume-based incentives. Should the actual
level of customer participation in these programs differ from those estimated, additional
adjustments to revenue may be required. We also allow credit for products returned within our
policy terms. We record an allowance for estimated returns at the time of sale based on historical
experience, recent gross sales levels and any notification of pending returns. Should the actual
returns differ from those estimated, additional adjustments to revenue and cost of sales may be
required.
Our current and long-term deferred revenue includes funds received in connection with sales of our
Enhanced Advantage Breast Implant Limited Warranty program. The fees received are deferred and
recognized as revenue evenly over the life of the warranty term.
Accounts Receivable
We market our products to a diverse customer base, principally throughout the United States,
Canada, Western Europe, Central and South America, and the Pacific Rim. We grant credit terms in
the normal course of business to our customers, primarily hospitals, doctors and distributors. We
perform ongoing credit evaluations of our customers and adjust credit limits based upon payment
history and the customer’s current credit worthiness, as determined through review of their current
credit information. We continuously monitor collections and payments from customers and maintain
allowances for doubtful accounts for estimated losses resulting from the inability of some of our
customers to make required payments. Estimated losses are based on historical experience and any
specifically identified customer collection issues. If the financial condition of our customers,
or the economy as a whole, were to deteriorate resulting in an impairment of our customers’ ability
to make payments, additional allowances may be required. These additional allowances for estimated
losses would be included in selling, general and administrative expenses.
33
Inventories
We value our inventory at the lower of cost, based on the first-in first-out (“FIFO”) cost method,
or the current estimated market value of the inventory. We write down our inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market conditions. If
actual future demand or market conditions differ from those projected by us, additional inventory
valuation adjustments may be required. These additional valuation adjustments would be included in
cost of sales.
Warranty Reserves
We offer two types of warranties relating to our breast implants in the United States and Canada:
a standard limited warranty which is offered at no additional charge and an enhanced limited
warranty, generally sold for an additional charge of $100 in the U.S. ($100 CAD in Canada), both of
which provide limited financial assistance in the event of a deflation or rupture. Our standard
limited warranty is also offered in certain European and other international countries for silicone
gel-filled breast implants. As a competitive market response to offers made by our primary
competitor as a result of the silicone gel breast implant post approval environment in the U.S.,
during the fourth quarter of fiscal 2007, we began a limited-time offer of free enrollment in our
Enhanced Advantage Limited Warranty for MemoryGel™ implants implanted after February 15, 2007. We
provide an accrual for the estimated cost of the standard and/or free limited breast implant
warranties at the time revenue is recognized. The cost of the enhanced
limited warranty, when sold at an additional charge to the customer, is recognized as costs are incurred. Costs related to warranties are recorded in cost of
sales. The accrual for the
standard and/or free limited warranty is based on estimates, which are based on relevant factors such as unit
sales, historical experience, the limited warranty period, estimated costs, and, to a limited
extent, information developed using actuarial techniques. The accrual is analyzed periodically for
adequacy. While we engage in extensive product quality programs and processes, including actively
monitoring and evaluating the quality of our component suppliers, the warranty obligation is
affected by reported rates of warranty claims and levels of financial assistance specified in the
limited warranties. Should actual patient claim rates reported differ from our estimates and/or
changes in claim rates result in revised actuarial assumptions, adjustments to the estimated
warranty liability may be required. These adjustments would be included in cost of sales. Our
warranty programs may be modified in the future in response to the competitive market environment.
Such changes may impact the amount and timing of the associated revenue and expense for these
programs.
Product Liability Reserves
We have product liability reserves for product-related claims to the extent those claims may result
in litigation expenses, settlements or judgments within our self-insured retention limits. We have
also established additional reserves, through our wholly-owned captive insurance company, for
estimated liabilities for product-related claims based on actuarially determined estimated
liabilities, taking also into account our excess insurance coverages. The actuarial valuations are
based on historical information and certain assumptions about future events. Product liability
costs are recorded in selling, general and administrative expenses as they are directly under the
control of our General Counsel and other general and administrative staff and are directly impacted
by our overall corporate risk management strategy. Should actual product liability experience
differ from the estimates and assumptions used to develop these reserves, subsequent changes in
reserves will be recorded in selling, general and administrative expenses, and may affect our
operating results in future periods.
Goodwill and Intangible Asset Impairment
We evaluate long-lived assets, including goodwill and other intangibles, for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset may not be
recoverable. In addition, we evaluate goodwill and other intangibles annually in the fourth
quarter of each fiscal year. In assessing the recoverability of goodwill and other intangibles, we
must make assumptions regarding estimated future cash flows and other factors to determine the fair
value of the respective assets. The impairment tests performed in fiscal 2007 and fiscal 2005
indicated certain impaired assets, for which we recorded impairment charges in those respective
fiscal years. These
impairment charges are included in the results of operations. Our tests performed in fiscal 2006
did not indicate impairment. See Note I – “Intangible Assets and Goodwill” of the “Notes to the
Consolidated Financial Statements.”
34
Stock-Based Compensation Expense for Fiscal 2007 and Thereafter
Effective April 1, 2006 we adopted SFAS No. 123 (revised 2004), Share-Based Payment, or SFAS
123(R). SFAS 123(R) requires all share-based payments, including grants of stock options,
restricted stock units and employee stock purchase rights, to be recognized in our financial
statements based on their respective grant date fair values. Under this standard, the fair value of
each employee stock option and employee stock purchase right is estimated on the date of grant
using an option pricing model that meets certain requirements. We currently use the Black-Scholes
option pricing model to estimate the fair value of our share-based payments. The Black-Scholes
model meets the requirements of SFAS 123(R), but the fair values generated by the model may not be
indicative of the actual fair values of our stock-based awards as it does not consider certain
factors important to stock-based awards, such as continued employment, periodic vesting
requirements and limited transferability. The determination of the fair value of share-based
payment awards utilizing the Black-Scholes model is affected by our stock price and a number of
assumptions, including expected volatility, expected life, risk-free interest rate and expected
dividends. We use the historical volatility for our stock as the expected volatility assumption
required in the Black-Scholes model. We believe that our historical volatility is the best
estimate of our future volatility. The expected life of the stock options is based on historical
and other economic data trended into the future. The risk-free interest rate assumption is based
on observed interest rates appropriate for the terms of our stock options and stock purchase
rights. The dividend yield assumption is based on our history and expectation of dividend payouts.
The fair value of our restricted stock units is based on the fair market value of our common stock
on the date of grant. Stock-based compensation expense recognized in our financial statements in
fiscal 2006 and thereafter is based on awards that are ultimately expected to vest. The amount of
stock-based compensation expense in fiscal 2007 has been reduced for estimated forfeitures based on
historical experience. Forfeitures are required to be estimated at the time of grant and revised,
if necessary, in subsequent periods if actual forfeitures differ from those estimates. We
evaluate the assumptions used to value stock awards on a quarterly basis. If factors change and we
employ different assumptions, stock-based compensation expense may differ significantly from what
we have recorded in the past. If there are any modifications or cancellations of the underlying
unvested securities, we may be required to accelerate, increase or cancel any remaining unearned
stock-based compensation expense. To the extent that we grant additional equity securities to
employees or we assume unvested securities in connection with any acquisitions, our stock-based
compensation expense will be increased by the additional unearned compensation resulting from those
additional grants or acquisitions. Had we adopted and applied the provisions of SFAS 123(R) in
fiscal 2005 and 2006, the magnitude of the impact of that standard on our results of operations
would have approximated the impact of SFAS 123 assuming the application of the Black-Scholes option
pricing model as described in the disclosure of pro forma net income and pro forma net income per
share in Note G of our “Notes to Consolidated Financial Statements”.
35
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, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net sales |
|
|
100 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
26.0 |
% |
|
|
25.8 |
% |
|
|
25.7 |
% |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
74.0 |
% |
|
|
74.2 |
% |
|
|
74.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative |
|
|
39.8 |
% |
|
|
37.7 |
% |
|
|
34.3 |
% |
Research and development |
|
|
11.6 |
% |
|
|
10.8 |
% |
|
|
10.0 |
% |
Long-lived
asset impairment and restructuring charges |
|
|
0.9 |
% |
|
|
— |
|
|
|
1.0 |
% |
Severance charges |
|
|
— |
|
|
|
— |
|
|
|
3.0 |
% |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
21.7 |
% |
|
|
25.7 |
% |
|
|
26.0 |
% |
Interest expense |
|
|
(2.0 |
)% |
|
|
(2.1 |
)% |
|
|
(2.0 |
)% |
Interest income |
|
|
7.4 |
% |
|
|
1.5 |
% |
|
|
0.7 |
% |
Other income, net |
|
|
0.0 |
% |
|
|
0.1 |
% |
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
27.1 |
% |
|
|
25.2 |
% |
|
|
24.9 |
% |
Income taxes |
|
|
8.1 |
% |
|
|
7.3 |
% |
|
|
7.9 |
% |
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
|
19.0 |
% |
|
|
17.9 |
% |
|
|
17.0 |
% |
Income from discontinued operations, net of tax |
|
|
0.5 |
% |
|
|
5.3 |
% |
|
|
4.8 |
% |
Gain on sale of discontinued operations, net of tax |
|
|
76.7 |
% |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
96.2 |
% |
|
|
23.2 |
% |
|
|
21.8 |
% |
|
|
|
|
|
|
|
|
|
|
YEARS ENDED MARCH 31, 2007 AND 2006
Sales
Net sales increased 13% to $302.0 million from $268.3 million in the prior year. Net sales of
breast implant products increased 13% to $262.6 million from $233.2 million in the prior year.
Foreign exchange rate movements, primarily the Euro and Canadian Dollar, had a $2.6 million
year-to-year favorable impact on international net sales. Increased net sales were driven by
growth in our MemoryGel™ products partly offset by declines in saline products, both domestically
and internationally, due in part to regulatory approval of silicone-gel products in the United
States and Canada during the third quarter of fiscal 2007. We saw overall growth in unit sales of
breast implant products of approximately 6%. Although we try to avoid competing on price, we
continued to see competitive price pressure in the international markets for breast implants. Net
sales of body contouring products decreased 6% to $16.7 million from $17.8 million in the prior
year. Liposuction continues to be one of the leading surgical cosmetic procedures in the United
States; however, during fiscal 2007, we reviewed our body contouring products and made a strategic
decision to narrow our offering to products that carry higher margins. Other aesthetic products
net sales increased 31% to $22.7 million from $17.3 million in the prior year, primarily as a
result of increased revenue from our facial aesthetics products, including Niadyne’s NIA24™ line of
science-based cosmeceutical products that was launched domestically in May 2006.
We anticipate that our sales in fiscal 2008 will be driven by existing products, including sales of
our MemoryGel breast implants and facial aesthetic products in all markets.
36
Cost of Sales
Cost of sales for fiscal 2007 remained relatively unchanged at 26.0% of net sales, compared to
25.8% in fiscal 2006. Cost of sales for fiscal 2007 includes additional inventory reserves for the
discontinuation of certain low margin product lines in our body contouring business of $1.2
million. Partly offsetting this increase was a decrease in cost of sales as a percentage of net
sales, due in part to higher sales of MemoryGel implants in the U.S., which sell for a higher
average selling price and have a higher margin than the saline products they are beginning to replace. During the fourth
quarter of fiscal 2007, we began a limited-time offer of free enrollment in our Enhanced Advantage
Limited Warranty for MemoryGel™ implants implanted after February 15, 2007, in the U.S. Our cost of
sales may increase in fiscal 2008 related to this program.
Selling, General and Administrative
Selling, general and administrative expenses increased $19.1 million to $120.1 million, or 39.8% of
net sales, in fiscal 2007 compared to $101.0 million, or 37.7% of net sales, in fiscal 2006.
Contributing to the increased expenses were (i) higher equity compensation of $9.5 million due to
our adoption of FAS123R as of April 1, 2006, (ii) higher compensation expense, including salaries,
incentive compensation and severance of $7.6 million, (iii) higher costs of $2.9 million related to
conventions and meetings and the launch of our silicone-gel breast implants, and (iv) higher
expenses at our foreign sales subsidiaries due to fluctuations in exchange rates of $0.9 million.
These increases were partly offset by decreases related to (i) legal and professional fees of $3.4
million associated with a potential strategic transaction in fiscal 2006 that did not recur in
fiscal 2007, (ii) lower sales-and-use tax expense of $2.6 million as a result of resolutions of tax
audits, and (iii) lower advertising costs of $1.5 million due to the completion of our
direct-to-consumer television advertising program.
We expect selling, general and administrative expenses as a percentage of sales to be comparable or
slightly higher in fiscal 2008 when compared to fiscal 2007.
Research and Development
Research and development spending primarily supports our key strategic product development
programs.
Research and development expenses in fiscal 2007 increased $6.0 million to $35.0 million from $29.0
million in fiscal 2006. The increase in research and development spending was primarily to support
key strategic product development programs, including post-approval study costs related to our
silicone gel-filled breast implants, and expenses related to our botulinum toxin project and
hyaluronic acid-based dermal filler products. These increases were partly offset by lower
pre-market approval (PMA) study costs. During fiscal 2007, we entered into a commercialization agreement
with Genzyme for the manufacture and development of hyaluronic acid dermal fillers and a
development and manufacturing agreement with Genzyme for the manufacture of Puragen™.
We expect research and development expense to continue to increase in fiscal 2008 as a result of
the activities anticipated to occur under our botulinum toxin development program, our hyaluronic
acid dermal filler development program with Genzyme, our Puragen Plus development program, our
MemoryGel post-approval conditions and the costs of other PMAs.
Long-Lived Asset Impairment Charges
During fiscal 2007, we recorded a $2.6 million impairment charge related to our decision to close
our manufacturing and research facility in Scotland. The impairment charge relates to intangibles
of $1.2 million and other assets of approximately $1.4 million.
For further discussion related to asset impairments, see Note I of the Notes to Consolidated
Financial Statements.
Interest and Other Income and Expense
Interest expense increased to $6.2 million in fiscal 2007, compared to $5.7 million in fiscal 2006.
These costs included interest on our $150 million convertible subordinated notes at 23/4% issued in
December 2003, interest expense on
balances outstanding under our foreign lines of credit, commitment fees on our credit facilities
and amortization of debt issuance costs. The increase in interest expense was primarily
attributable to higher commitment fees and borrowings on our foreign lines of credit late in fiscal
2006.
37
Interest
income increased $18.4 million to $22.5 million compared to $4.1 million in fiscal 2006,
as a result of generally higher rates of interest and significantly higher balances of cash and
cash equivalents available for investment, primarily as a result of the cash proceeds received from
the sale of the Urology Business.
Income Taxes
Our effective rate of corporate income taxes was 29.9% in fiscal 2007, an increase of 0.9% of
pretax income from the 29.0% rate in fiscal 2006. This increase is primarily the result of
the accounting treatment of incentive stock options after the adoption of SFAS 123(R) and an
increase in taxes attributable to income from our foreign operations.
Net Income from Continuing Operations and Earnings Per Share
Net income from continuing operations in fiscal 2007 increased to $57.6 million from $48.1 million
in fiscal 2006. Basic earnings per share from continuing operations increased 22% to $1.37 per
share in fiscal 2007 from $1.12 per share in fiscal 2006. Diluted earnings per share from
continuing operations increased 23% to $1.24 for the current year compared to $1.01 for fiscal 2006
as a result of additional net income and a decrease in diluted weighted average shares outstanding
used to calculate diluted earning per share.
Income from Discontinued Operations, Net of Income Taxes
Income from discontinued operations, net of income taxes, represents the results of our former
surgical urology and clinical and consumer healthcare business segments, for two months prior to
their sale to Coloplast on June 2, 2006 and certain costs and expenses after that date. During
fiscal 2007, income from discontinued operations, net of income taxes, was $1.6 million compared to
$14.3 million in the prior year. For further details regarding discontinued operations, see Note S
of the Notes to Consolidated Financial Statements.
Gain on Sale of Discontinued Operations, Net of Income Taxes
For fiscal 2007, we recorded a net gain of $231.4 million after taxes and expenses related to the
sale of our Urology Business. We received proceeds of approximately
$456 million in cash and the
benefit of an indemnification related to certain foreign tax credits arising before the sale. For further details regarding
discontinued operations, see Note S of the Notes to Consolidated Financial Statements.
YEARS ENDED MARCH 31, 2006 AND 2005
Sales
Net sales increased 7% to $268.3 million from $251.7 million in the prior year. Net sales of
breast implant products increased 7% to $233.2 million from $217.4 million in the prior year. The
majority of the increase in breast implant product sales was attributable to organic growth in unit
sales of our breast implants and associated products. Foreign exchange rate movements, primarily
the Euro, had a minimal year-to-year impact on international net sales. Increased net sales were
driven by growth in the reconstruction markets both domestically and internationally. We saw
overall growth in unit sales of breast implant products of approximately 7%. Although we try to
avoid competing on price, we continued to see competitive price pressure in both the domestic and
international markets for breast implants. Net sales of body contouring products decreased 4% to
$17.8 million from $18.6 million in the prior year.
Liposuction continues to be one of the leading
surgical cosmetic procedures in the United States; however, we experienced softness in sales growth
in our body contouring business. Other aesthetic products net sales increased 10% to $17.3 million
from $15.7 million in the prior year, primarily as a result of increased revenue from our facial
aesthetics products, including Puragen™, which was launched in a variety of international markets
in May 2005.
38
Cost of Sales
Cost of sales for fiscal 2006 remained relatively unchanged at 25.8% of net sales, compared to
25.7% in fiscal 2005. Cost of sales had some variations in quarterly results primarily due to
timing of the building of silicone-gel breast implant inventory in anticipation of potential FDA
approval.
Selling, General and Administrative
Selling, general and administrative expenses increased $14.6 million to $101.0 million, or 37.7% of
net sales, in fiscal 2006 compared to $86.4 million, or 34.3% of net sales, in fiscal 2005. During
fiscal 2006, we incurred approximately $3.4 million of legal and professional fees related to a
potential strategic acquisition which did not materialize. We did not incur any similar fees
during fiscal 2005. Also contributing to the increased expenses was (i) an increase of
approximately $2.0 million in costs associated with our global facial aesthetics selling and
marketing efforts in support of our hyaluronic acid-based dermal filler product, Puragen™, (ii) an
increase of approximately $1.8 million in costs associated with the expansion of our domestic sales
force, (iii) higher levels of expenses at our foreign sales subsidiaries of approximately $1.8
million, (iv) an increase of approximately $1.6 million related to increased sales and marketing
efforts focusing on our international markets, (v) an increase of approximately $1.5 million in
compensation expense related to the issuance of restricted stock grants, and (vi) an increase of
approximately $0.9 million in our patient and physician education programs. To a lesser extent,
increased personnel costs in support of sales and marketing contributed to the year over year
increase. The increase in selling, general and administrative expenses was partially offset by a
decrease in performance-related compensation of approximately $2.9 million and the completion of
our direct-to-consumer television advertising program related to our breast implant products,
resulting in decreased expenses of approximately $1.4 million.
Research and Development
Research and development expenses in fiscal 2006 increased $3.8 million to $29.0 million from $25.2
million in fiscal 2005. The increase in research and development spending was primarily to support
key strategic product development programs, including our silicone gel-filled breast implant
regulatory submissions in the United States and Canada, our botulinum toxin project, U.S. clinical
studies for our hyaluronic acid-based dermal filler product, Puragen™, and the continued
development of automated manufacturing technologies.
Severance Charges
During the fourth quarter of fiscal 2005, two individuals resigned as directors and executive
officers of the Company. In connection with their resignation and severance agreements, we
incurred $8.5 million in expenses, comprised of $4.1 million in cash expense and $4.4 million in
non-cash expense.
Restructuring and Long-Lived Asset Impairment Charges
During the fourth quarter of fiscal year 2005, we incurred $1.7 million in expenses
related to restructuring of certain of our operations to achieve improved efficiencies and certain
long-lived assets that were determined to be impaired. The restructuring charges totaled $1.4
million and the impairment charges totaled $0.3 million.
Interest and Other Income and Expense
Interest expense increased to $5.7 million in fiscal 2006, compared to $5.1 million in fiscal 2005.
These costs included interest on our $150 million convertible subordinated notes at 23/4% issued in
December 2003, commitment fees on our credit facilities and amortization of debt issuance costs.
The increase in interest expense was primarily attributable to higher commitment fees and the
amortization of costs related to our credit facility.
Interest income increased $2.1 million to $4.1 million compared to $2.0 million in fiscal 2005, as
a result of generally higher rates of interest and higher balances of cash and cash equivalents
available for investment.
Other income primarily includes gains or losses on sales of marketable securities and foreign
currency gains or losses related to our foreign operations. Other income decreased to $0.2 million
from $0.5 million in the prior year. This decrease was the result of the increase in the Euro’s
relative strength compared to the U.S. dollar.
39
Income Taxes
Our effective rate of corporate income taxes was 29.0% in fiscal year 2006, a decrease of 2.8% of
pretax income from the 31.8% rate in fiscal year 2005. This decrease is a result of greater tax
benefits associated with our foreign operations, lower state taxes and increased research and
development credits. In the fourth fiscal quarter of 2006, we repatriated $32.0 million in foreign
profits, and estimated the tax liability on the repatriation was approximately $1.7 million.
Net Income from Continuing Operations and Earnings Per Share
Net income from continuing operations in fiscal 2006 increased to $48.1 million from $42.8 million
in fiscal 2005. Earnings per share from continuing operations increased 9.8% to $1.12 per share in
fiscal 2006 from $1.02 per share in fiscal 2005. Diluted earnings per share from continuing
operations increased 8.6% to $1.01 for the fiscal year compared to $0.93 for fiscal 2005 as a
result of additional net income, partially offset by an increase in diluted weighted average shares
outstanding used to calculate diluted earning per share.
Income from Discontinued Operations, Net of Income Taxes
Income from discontinued operations, net of income taxes, represents the results of our former
surgical urology and clinical and consumer healthcare business segments, which were sold to
Coloplast on June 2, 2006, as previously discussed. During fiscal 2006, income from discontinued
operations, net of income taxes, increased 18% to $14.3 million from $12.1 million in the prior
year. This increase is the result of an increase in net sales of $3.8 million, a decrease in cost
of sales of $3.9 million, and a decrease in research and development expense of $1.9 million,
partially offset by a $2.5 million increase in selling, general and administrative expense and a
$4.2 million increase in income tax expense. The increase in net sales was less than historic
rates of growth due to the disruption as a result of the aforementioned sale process in the second
half of the fiscal year, the negative impact of foreign exchange movements of $3.7 million, and the
decrease of $1.9 million due to a planned reduction of OEM contract revenue from $5.7 million to
$3.8 million. Cost of sales decreased due to an improved manufacturing process, changes to a more
profitable product mix following decreased OEM sales, and product rationalization. The increased
selling, general and administrative expenses were partially offset by decreased restructuring and
long-term asset impairment charges recorded in the fourth quarter of the prior year, and a
favorable impact of foreign exchange rate movements of $1.5 million. Income tax expense related to
discontinued operations increased due to an additional provision related to open audit issues. For
further details regarding discontinued operations, See Note S of the Notes to Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities and from the exercise of employee stock options has been our
primary recurring source of funds. During fiscal 2007, we completed the sale of our Urology
Business to Coloplast for total consideration of $463 million, which is subject to customary
post-closing adjustments and includes non-cash consideration
consisting of the value of an indemnification by Coloplast to Mentor
related to certain
foreign tax credits that Mentor expects to realize arising from the transaction prior to the close.
On the closing date of June 2, 2006, we received $446 million in cash from Coloplast, and an
additional $10 million is held under an escrow agreement in connection with the transaction and an
additional $2 million was received from an unrelated third party. After expenses, we expect net
after-tax proceeds from the sale to be approximately $318 million. We believe that existing funds,
cash generated from continuing operations, and existing sources of and access to financing are
adequate to satisfy our working capital, capital expenditure, dividends, and debt service
requirements for the foreseeable future. We believe that the loss of future cash flows from our
discontinued surgical urology and clinical and consumer healthcare segments will not have a
significant negative impact on our future finance levels, terms of financing or covenants. Cash
flows have been segregated between continuing operations and discontinued operations in the
accompanying Consolidated Statements of Cash Flows.
40
As of March 31, 2007, we had cash, cash equivalents and short-term marketable securities of $487.7
million, an increase of $286.7 million, compared to $201.0 million as of March 31, 2006. The
principal components of the increase in cash, cash equivalents and marketable securities were cash
proceeds of $456 million from the sale of our Urology Business, cash generated from operating
activities of continuing operations of $68.9 million, proceeds of $24.2 million from the exercise
of employee stock options and stock purchases under our Employee Stock Purchase Plan, offset by
$121.8 million of cash used in discontinued operations (primarily income taxes on the gain on sale
and transaction costs), $93.0 million for shares repurchased, $30.5 million in dividends paid,
$14.0 million for repayment of debt on our foreign lines of credit, $13.6 million in net purchases
of marketable securities and $12.5 million used for capital expenditures of continuing operations.
We invest excess cash in marketable securities that are highly liquid, of high-quality investment
grade, and which have varying maturities. Our short-term marketable securities consist primarily
of money market funds, state and municipal government and government agency obligations, Federal
Home Loan Bank and Mortgage Association bonds, and investment-grade corporate obligations,
including commercial paper.
| |
|
|
|
|
|
|
|
|
| |
|
As of March 31, |
|
| (in thousands) |
|
2007 |
|
|
2006 |
|
Cash and cash equivalents |
|
$ |
371,525 |
|
|
$ |
98,713 |
|
Marketable debt securities |
|
|
116,215 |
|
|
|
102,241 |
|
|
|
|
|
|
|
|
Total cash, cash equivalents and marketable debt securities |
|
$ |
487,740 |
|
|
$ |
200,954 |
|
|
|
|
|
|
|
|
Percentage
of total assets of continuing operations |
|
|
69 |
% |
|
|
51 |
% |
Cash Flow Changes
The following table summarizes our cash flow activity:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, |
|
| (in thousands) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net cash provided by operating activities of continuing operations |
|
$ |
68,948 |
|
|
$ |
99,044 |
|
|
$ |
62,591 |
|
Net cash provided by (used for) investing activities of continuing
operations |
|
|
429,696 |
|
|
|
(76,052 |
) |
|
|
(35,032 |
) |
Net cash used for financing activities of continuing operations |
|
|
(104,653 |
) |
|
|
(16,122 |
) |
|
|
(99,894 |
) |
Net cash provided by (used for) discontinued operations |
|
|
(121,842 |
) |
|
|
15,957 |
|
|
|
30,128 |
|
Effect of currency exchange rates on cash and cash equivalents |
|
|
663 |
|
|
|
(780 |
) |
|
|
648 |
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
$ |
272,812 |
|
|
$ |
22,047 |
|
|
$ |
(41,559 |
) |
|
|
|
|
|
|
|
|
|
|
Cash Provided by Operating Activities of Continuing Operations
Cash provided by operating activities of continuing operations of $68.9 million, $99.0 and $62.6
million for the years ended March 31, 2007, 2006 and 2005, respectively, was greater than net
income in those years, due to the net impact of non-cash adjustments to income. Non-cash
adjustments include tax benefits from the exercise of employee stock options, non-cash equity
compensation, depreciation and amortization, deferred income taxes, loss on the disposal of assets
and impairment charges. For the year ended March 31, 2007, operating cash flows were negatively
impacted in the amount of $20.2 million by changes in working capital balances from continuing
operations. At March 31, 2006 and 2005, operating cash flows were positively impacted by changes
in working capital in the amount of $12.0 million and $0.3 million, respectively. Our working
capital was $524.6 million at March 31, 2007, and $201.6 million at March 31, 2006.
Cash Provided by Investing Activities of Continuing Operations
For the year ended March 31, 2007, total cash provided by investing activities of continuing
operations was $429.7 million, including $455.3 million in proceeds from the sale of our Urology
Business. Our net purchases of marketable securities totaled $13.6 million and our capital
expenditures totaled $12.5 million. We anticipate our capital
expenditures to total approximately $25 million to $30 million in fiscal 2008, as we will continue
to make milestone payments under the Genzyme agreement discussed above, and continue to invest in
our new botulinum toxin manufacturing plant, facility improvements, software to support our
manufacturing processes, and production equipment. For the year ended March 31, 2006, total cash
used in investing activities of continuing operations was $76.0 million. This amount was comprised
of net investments of $66.0 million in marketable securities and approximately $10.1 million in
capital expenditures.
41
Cash Used for Financing Activities of Continuing Operations
Net cash from financing activities is primarily a result of cash provided by employee stock option
exercises, cash used in payments of dividends and our stock repurchase program, and the net impact
of our debt financing activities.
We have a stock repurchase program, primarily to reduce the overall number of shares outstanding
and to offset the dilutive effect of our employee equity compensation program. All shares
repurchased under the program are retired and are no longer deemed to be outstanding. The timing
of our repurchases is subject to market conditions, cash availability and terms of our 10b5-1 stock
purchase plan. There is no guarantee that shares authorized for repurchase by the Board will
ultimately be repurchased.
On June 5, 2006, we agreed to repurchase 2 million additional shares from an investment partnership
managed by ValueAct Capital at $42.00 per share, a discount from the closing market price quoted on
the NYSE of $42.21 on that date. The 2.0 million shares were repurchased for a total of $84
million pursuant to the Company’s continuing stock repurchase program. Mr. Jeff Ubben, managing
director of ValueAct Capital, was then a member of our Board of Directors. The repurchase of these
shares was pre-approved by the Audit Committee and the Board of Directors with interested parties
abstaining or not in attendance.
On June 16, 2006, we entered into a stock purchase plan for the purpose of repurchasing shares of
the Company’s common stock. Repurchases are made under a Rule 10b5-1 Plan (10b5 Plan) compliant
with Rule 10b-18. The timing of purchases and the exact number of shares to be purchased will
depend on market conditions. The repurchase program and the 10b5 Plan may be suspended or
discontinued at any time. In connection with our entry into the 10b5 Plan, the Board of Directors
increased the authorized number of shares available for repurchase pursuant to our stock repurchase
program and under the 10b5 Plan from 3.3 million to 5.0 million shares. The Board approved the
repurchase of shares of our common stock under the 10b5 Plan in an amount not to exceed $166
million in total repurchases (subject also to the 5.0 million share limitation), consistent with
the limitations set forth in our $200 million Credit Agreement, dated as of May 25, 2005, as
amended on May 31, 2006. The Credit Agreement was again amended on March 30, 2007. This second
amendment permits the repurchase of up to $400 million worth of our stock after March 30, 2007. We
purchased 175,100 shares during fiscal 2007 at a total cost of $8.2 million under the Rule 10b5
Plan as of March 31, 2007, leaving an additional 4.8 million shares of our stock at a maximum
purchase price of $158 million authorized for repurchase under
the Plan. As of May 23, 2007, during
fiscal 2008, an additional 2.7 million shares had been repurchased at an average share price of
$40.34.
The Board of Directors declared quarterly cash dividends per share of $0.18 for the first three
quarters and $0.20 for the fourth quarter of fiscal 2007. It is our intent to continue to pay
dividends for the foreseeable future subject to, among other things, Board approval, cash
availability, debt and line of credit restrictions and alternative cash needs. Total dividend
payments during fiscal 2007 were $30.5 million.
We receive cash from the exercise of employee stock options and to a lesser degree from our
employee stock purchase plan (“ESPP”). Employee stock option exercises and ESPP purchases provided
$24.2 million and $43.6 million of cash in fiscal 2007 and 2006, respectively. Proceeds from the
exercise of employee stock options will vary from period to period based upon, among other factors,
fluctuations in the market value of our common stock relative to the exercise price of such
options.
Cash (Used For) Provided by Discontinued Operations
Cash (used for) provided by discontinued operations was $(121.8) million and $16.0 million for the
years ended March 31, 2007 and 2006, respectively. The amount in 2007 was mainly related to tax
payments associated with the gain on
sale of the Urology Business. The amount in 2006 was comprised of $25.4 million provided by
operating activities of discontinued operations, less capital expenditures of $4.4 million, $2.2
million repaid on lines of credit, $0.8 million in loans made and $2.0 million in currency exchange
rate adjustments.
42
Financing Arrangements
Senior Credit Facility
On May 26, 2005, we entered into a three-year Credit Agreement (“Credit Agreement”) that provides
us with a $200 million senior revolving credit facility, subject to a $20 million sublimit for the
issuance of standby and commercial letters of credit, a $10 million sublimit for swing line loans,
and a $50 million alternative currency sublimit. At our election and subject to lender approval,
the amount available for borrowings under the Credit Agreement may be increased by an additional
$50 million. Funds are available under the Credit Agreement to finance permitted acquisitions,
stock repurchases up to certain dollar limitations, and for other general corporate purposes. We
have three standby letters of credit totaling $2 million outstanding under the Credit Agreement.
Accordingly, although there were no borrowings outstanding under the Credit Agreement at March 31,
2007, only $198 million was available for borrowings.
On May 31, 2006, we amended the Credit Agreement to permit the consummation of the sale of our
Urology Business. Additionally, the amendment modified the minimum adjusted consolidated EBITDA
covenant that we are required to comply with under the terms of the Credit Agreement. The
amendment also amends certain negative covenants contained in the Credit Agreement, including
amendments to the covenants restricting our ability to make investments and incur indebtedness and
an amendment increasing the amount of our equity securities that we are permitted to repurchase.
As of May 23, 2007, there were no borrowings outstanding under the Credit Agreement. On March 30,
2007, we amended the Credit Agreement a second time. The amendment permits us to declare or pay
annual dividends up to $0.90 per share and repurchase up to an aggregate of $400 million worth of
our common stock after March 30, 2007.
Interest on borrowings (other than swing line loans and alternative currency loans) under the
Credit Agreement is at a variable rate that is calculated, at our option, at the prime rate, or a
Eurocurrency rate for deposits denominated in U.S. dollars plus an additional percentage that
varies between 1.00% and 1.65%, depending on our senior leverage ratio at the time of the
borrowing. Swing line loans bear interest at the prime rate. Alternative currency loans bear
interest at the Eurocurrency rate for deposits denominated in the applicable currency plus the same
additional percentage. In addition, we paid certain fees to the lenders to initiate the Credit
Agreement and pay an unused commitment fee based on our senior leverage ratio and unborrowed lender
commitments.
Borrowings under the Credit
Agreement are guaranteed by certain of our domestic subsidiaries and
are also secured by a pledge of 100% of the outstanding capital stock of certain of our other
domestic subsidiaries. In addition, if the ratio of total funded debt to adjusted earnings before
interest, taxes, depreciation and amortization (or “adjusted EBITDA”) exceeds 2.50 to 1.00, then we
are obligated to grant to the lenders a first priority perfected security interest in essentially
all of our domestic subsidiaries’ assets.
The Credit Agreement imposes certain financial and operational restrictions, including financial
covenants that require us to maintain a maximum consolidated funded debt leverage ratio of not
greater than 4.00 to 1.00, a senior funded debt ratio of not greater than 2.50 to 1.00, a minimum
quarterly adjusted EBITDA, and a minimum fixed charge ratio of greater than 1.25 to 1.00. The
covenants also restrict our ability, among other things, to make certain investments, incur certain
types of indebtedness or liens, make acquisitions in excess of $20 million except in compliance
with certain criteria, and repurchase shares of common stock, pay dividends or dispose of assets
above specified thresholds. The Credit Agreement also contains customary events of default,
including payment defaults, material inaccuracies in our representations and warranties, covenant
defaults, bankruptcy and involuntary proceedings, monetary judgment defaults in excess of specified
amounts, cross-defaults to certain other agreements, change of control, and ERISA defaults.
Other Financing
On October 4, 2005, Mentor Medical Systems B.V. (“Mentor BV”), a wholly-owned subsidiary of Mentor
Corporation, entered into a Loan and Overdraft Facility (the “Facility”) with Cooperative RaboBank
Leiden, Leiderdorp en Oestgstgeest U.A. (“RaboBank”).
The
Facility provided Mentor BV with an initial €15 million loan and overdraft facility, which
began decreasing by €375,000 quarterly in September 2006. Under the Facility, Mentor BV may
borrow up to €12.5 million in fixed amount advances, with terms of three to six months, and a
further sublimit of up to €5 million of loans in fixed amount advances with a term of up to five
years. Up to €10 million of the Facility may be drawn in the form of U.S. dollars. Funds under
the Facility are available to Mentor BV to finance certain dividend payments to Mentor Corporation
and for other normal business purposes. On March 31, 2006 we borrowed $14 million under the
Facility to partially fund our repatriation of foreign earnings for reinvestment in the U.S. and
during the year ended March 31, 2007, we had fully repaid this balance. Accordingly, $18.5 million
was available under this facility at March 31, 2007.
43
Interest on borrowings under the Facility is at a rate equal to 0.55% over the RaboBank base
lending rate, Euribor, or LIBOR depending upon the currency and term of each borrowing. Interest
rates on borrowings other than overdrafts are fixed for the term of the advance. Borrowings by
Mentor BV under the Facility are guaranteed by Mentor’s wholly-owned subsidiary, Mentor Medical
Systems C.V., through a Joint and Several Debtorship Agreement. In addition, borrowings under the
Facility are secured by a mortgage on certain real estate owned by Mentor BV. The Facility imposes
certain financial and operational restrictions on Mentor BV, including financial covenants that
require Mentor BV and Mentor Medical Systems CV to maintain a minimum combined defined solvency
ratio, a maximum combined debt leverage ratio of not greater than 4 to 1, a senior funded debt
ratio of not greater than 2.5 to 1, minimum quarterly operational results, and a minimum interest
coverage ratio of greater than 5 to 1. The Facility also contains customary events of default,
including cross default and material or adverse change provisions. If an event of default occurs,
the commitments under the Facility may be terminated and the principal amount and all accrued but
unpaid interest and other amounts owed thereunder may be declared immediately due and payable. As
of March 31, 2007, all covenants and restrictions had been satisfied. Mentor BV paid €15,000 in
certain fees to the RaboBank upon entry into the Facility, and Mentor BV will be obligated to pay,
over the 10 year term of the Facility, a commitment fee of 0.25% of the committed and unborrowed
balances. Fees are payable quarterly in arrears. In addition to our RaboBank Facility, we
previously established several lines of credit with local foreign lenders to facilitate operating
cash flow needs at our foreign Urology subsidiaries. These unsecured lines had no borrowings at
March 31, 2006 and were terminated with the sale of our Urology Business on June 2, 2006.
At March 31, 2007, we had no short-term or long-term borrowings under all lines of credit. The
total amount of additional borrowings available to us under all lines of credit was $216.5 million
at March 31, 2007, and $202.2 million at March 31, 2006.
Convertible Subordinated Notes
On December 22, 2003, we completed an offering of $150 million of convertible subordinated notes
due January 1, 2024, pursuant to Rule 144A under the Securities Act of 1933. The notes bear
interest at 23/4% per annum and are convertible into shares of our common stock at an initial
conversion price of $29.289 per share and are subordinated to all existing and future senior debt.
As a result of our dividend increases the conversion price has been adjusted to $29.079 and each
$1,000 principal amount will be convertible into 34.3886 shares of common stock. Concurrent with
the issuance of the convertible subordinated notes, we entered into a convertible bond hedge and
warrants transactions with respect to our common stock, the exposure for which is held by Credit
Suisse First Boston LLC for a net cash payment of $18.5 million. Both the bond hedge and the
warrants transactions may be settled at our option either in cash or net shares and expire January
1, 2009. The convertible bond hedge and warrants transactions combined are intended to reduce the
potential dilution from conversion of the notes by effectively increasing the conversion price per
share, from our perspective, to approximately $39.1453.
One of the conditions required for conversion of the notes has been satisfied and accordingly, the
holders of notes have the option to convert the notes into common shares at the aforementioned
adjusted conversion price per share. The warrant holder also has the right to purchase 5.2 million
shares when the share price of our common stock as quoted on the NYSE exceeds the current exercise
price of $39.1453 per share.
44
Contractual Obligations and Commitments
The following table summarizes our significant contractual obligations and other commitments at
March 31, 2007, and the effect such obligations are expected to have on our liquidity and cash
flows in future periods.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period |
|
| |
|
|
|
|
|
Less than |
|
|
1-3 |
|
|
4-5 |
|
|
More than |
|
| (in thousands) |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
| Contractual Obligations |
|
|
|
|
|
|
|
|
|
|
|
Convertible notes |
|
$ |
150,000 |
|
|
$ |
— |
|
|
$ |
150,000 |
|
|
$ |
— |
|
|
$ |
— |
|
Milestone commitments |
|
|
27,760 |
|
|
|
12,760 |
|
|
|
14,500 |
|
|
|
500 |
|
|
|
— |
|
Operating lease obligations |
|
|
27,529 |
|
|
|
4,451 |
|
|
|
9,149 |
|
|
|
8,020 |
|
|
|
5,909 |
|
Purchase obligations |
|
|
22,779 |
|
|
|
16,279 |
|
|
|
6,500 |
|
|
|
— |
|
|
|
— |
|
Interest on convertible notes |
|
|
7,219 |
|
|
|
4,125 |
|
|
|
3,094 |
|
|
|
— |
|
|
|
— |
|
Credit agreement (commitment fees) |
|
|
925 |
|
|
|
450 |
|
|
|
200 |
|
|
|
100 |
|
|
|
175 |
|
Other long-term liabilities |
|
|
831 |
|
|
|
440 |
|
|
|
391 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
237,043 |
|
|
$ |
38,505 |
|
|
$ |
183,834 |
|
|
$ |
8,620 |
|
|
$ |
6,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The nature of our business creates a need to enter into purchase obligations with suppliers. In
accordance with accounting principles generally accepted in the United States, these unconditional
purchase obligations are not reflected in the accompanying consolidated balance sheets. Inventory
related and other purchase obligations do not exceed our projected requirements over the normal
course of business.
We enter into various product and intellectual property acquisitions and business combinations. In
connection with some of these activities, we agree to make payments to third parties when specific
milestones are achieved, such as receipt of regulatory approvals or achievement of performance or
operational targets.
The expected timing of payment of the obligations discussed above is estimated based on current
information. Timing of payments and actual amounts paid may be different depending on the time of
receipt of goods or services or changes to agreed-upon amounts for some obligations. Amounts
disclosed as contingent or milestone-based obligations are dependent on the achievement of the
milestones or the occurrence of the contingent events and can vary significantly.
We do not have any off-balance sheet arrangements that are currently material or reasonably likely
to be material to our financial position or results of operations.
We believe that funds generated from operations, our cash, cash equivalents and marketable
securities, net after-tax proceeds from our sale of the Urology Business, plus funds available
under our line of credit agreements, will be adequate to meet our working capital needs and capital
expenditure investment requirements and commitments for the foreseeable future. However, it is
possible that we may need to raise additional funds to finance unforeseen requirements or to
consummate acquisitions of other businesses, products or technologies through the sale of equity or
debt securities to the public or to selected investors, or by borrowing money from financial
institutions. In addition, even though we may not need additional funds in the short-term, we may
still elect to sell additional equity or debt securities or borrow for other reasons. There are no
assurances that we will be able to obtain additional funds on terms that would be favorable to us,
or at all. If funds are raised by issuing additional equity securities or convertible debt
securities, the ownership percentage of existing shareholders would be reduced. In addition,
equity or debt securities issued by us may have rights, preferences or privileges senior to those
of our common stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The following discussion about our market risks involves forward-looking statements. Actual
results could differ materially from those projected in the forward-looking statements. We are
exposed to market risk related to fluctuations in interest rates and foreign exchange rates. We
generally do not use derivative instruments.
45
Interest Rate Risk
We maintain a portfolio of highly liquid cash equivalents with maturities of three months or less
from the date of purchase. We also have current marketable securities, consisting primarily of tax
exempt variable demand notes, government agency obligations, Federal Home Loan Bank and Mortgage
Association Bonds, and investment grade corporate obligations, including commercial paper that are
of limited credit risk and have contractual maturities of less than two years. Given the relative
short-term nature of these investments, we do not expect to experience any material impact upon our
results of operations as a result of changes to interest rates related to these investments.
On December 22, 2003, we completed an offering of $150 million of convertible subordinated notes
due January 1, 2024 pursuant to Rule 144A under the Securities Act of 1933. The notes bear
interest at a fixed rate of 23/4% per annum. Our subsidiaries may also borrow certain levels of
variable rate debt under operating lines of credit. No variable rate borrowings are outstanding at
March 31, 2007. The majority of our debt carries a fixed rate percentage and therefore is not
subject to significant interest rate risk. A 100 basis point change in interest rates would not
have a material impact on our results of operations or financial condition related to the variable
rate debt described.
Exchange Rate Risk
A portion of our operations consist of sales activities in foreign markets. We manufacture our
products primarily in the United States and Europe and sell them throughout the world through a
combination of wholly-owned sales offices and international distributors. Sales to third-party
distributors and to the wholly-owned sales offices are transacted in U.S. dollars, Euros, British
Pounds, and Canadian dollars. Our foreign sales offices primarily invoice customers in their local
currency.
As a result, our financial results could be significantly affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in the foreign markets mentioned. The
principal risk exposure we face results from fluctuation in foreign exchange rates. We experience
transactional exchange rate risk when one of our subsidiaries enter into transactions denominated
in currencies other than their local currency. In the last two fiscal years, the effect of
exchange rate risk has been favorable upon our operating results and financial condition. We do
not currently hedge any of the foreign exchange rate exposures. A significant and rapid change in
foreign exchange rates could have a material adverse effect upon our results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this Item is submitted pursuant to Item 15 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.
46
ITEM 9A. CONTROLS AND PROCEDURES.
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure
that information required to be disclosed in our reports filed or submitted under the Exchange Act,
is recorded, processed, summarized and reported within the time periods specified in the SEC’s
rules and forms, and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control objectives, and
management necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
We carried out an evaluation under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of March 31, 2007, the end of the
period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were effective at the
reasonable assurance level as of March 31, 2007.
Further, management has determined that there have been no changes in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
quarter ended March 31, 2007 that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
47
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining adequate internal control
over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange
Act of 1934. The Company’s internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles in the U.S. However, all internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and reporting.
Management assessed the effectiveness of the Company’s internal control over financial reporting as
of March 31, 2007. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organization of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on our assessment, management believes that the Company
maintained effective internal control over financial reporting as of March 31, 2007 based on those
criteria.
Management’s assessment of the effectiveness of the Company’s internal control over financial
reporting has been audited by Ernst & Young, LLP, an independent registered public accounting firm,
as stated in their report appearing below, which expresses unqualified opinions on management’s
assessment and on the effectiveness of the Company’s internal control over financial reporting as
of March 31, 2007.
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Shareholders of Mentor Corporation
We have audited management’s assessment, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting, that Mentor Corporation (the “Company”) maintained
effective internal control over financial reporting as of March 31, 2007, based on criteria
established in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). The Company’s management is
responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management’s assessment and an opinion on the effectiveness of the
company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Mentor Corporation maintained effective internal
control over financial reporting as of March 31, 2007, is fairly stated, in all material aspects,
based on the COSO criteria. Also, in our opinion, Mentor Corporation maintained, in all material
respects, effective internal control over financial reporting as of March 31, 2007, based on the
COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Mentor Corporation as of March 31, 2007
and 2006 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, 2007 and our report dated May
23, 2007 expressed an unqualified opinion thereon.
/s/Ernst & Young LLP
Los Angeles, California
May 23, 2007
49
ITEM 9B. OTHER INFORMATION.
On May 30, 2007, Michael Nakonechny resigned as a member of our Board of Directors and the
Compensation and Audit Committees thereof. Mr. Nakonechny served as a member of the Board of
Directors since 1980. There were no disagreements between Mr. Nakonechny and us on any matter
relating to our operations, policies or practices.
On
May 30, 2007, the Compensation Committee of the Board of
Directors approved a special cash bonus award of $250,000 for Josh
Levine, our Chief Executive Officer, as a reward for his leadership
in our efforts to obtain FDA approval of our silicone gel-filled
breast implants.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
Certain biographical information required by this Item with respect to our executive officers is
set forth in Item 1, Business. Other required information is hereby incorporated by reference to
our Proxy Statement for the 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, 2007.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is herein incorporated by reference to information in our
Proxy Statement for the 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, 2007.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
The information required by this Item is herein incorporated by reference to information in our
Proxy Statement for the 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, 2007.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE.
The information required by this Item is herein incorporated by reference to information in our
Proxy Statement for the 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, 2007.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this Item is herein incorporated by reference to information under the
heading “Ratification of Independent Auditors” in our Proxy Statement for the 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, 2007.
50
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) (1) Consolidated Financial Statements
| |
|
|
|
|
|
|
|
|
|
|
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets as of March 31, 2007 and 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Income for the Years Ended March 31, 2007, 2006 and 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended March 31, 2007, 2006 and
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the Years Ended March 31, 2007, 2006 and 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
Exhibits |
|
|
|
|
|
|
|
|
|
|
|
|
|
The information required by this item is incorporated by reference to the Exhibit Index in this report. |
|
|
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON THE FINANCIAL STATEMENTS
The Board of Directors and Shareholders of Mentor Corporation
We have audited the accompanying consolidated balance sheets of Mentor Corporation as of March 31,
2007 and 2006, 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, 2007. Our audits also
included the financial statement schedule listed in the Index at Item 15(a)(2). 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 the standards of the Public Company Accounting Oversight
Board (United States). 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, 2007 and 2006, and
the consolidated results of its operations and its cash flows for each of the three years in the
period ended March 31, 2007, in conformity with U.S. 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.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Mentor Corporation’s internal control over financial
reporting as of March 31, 2007, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated May 23, 2007 expressed an unqualified opinion thereon.
As discussed in Note A to the Consolidated Financial Statements, the Company changed its method of
accounting for stock-based compensation in 2007 upon adoption of Statement of Financial Standards
No. 123 (R), “Share-Based Payments”.
/s/ERNST & YOUNG LLP
Los Angeles, California
May 23, 2007
52
MENTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
| (in thousands, except share data) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
371,525 |
|
|
$ |
98,713 |
|
Marketable securities |
|
|
116,215 |
|
|
|
102,241 |
|
Accounts receivable, net of allowance for doubtful accounts
of $4,534 in 2007 and $4,616 in 2006 |
|
|
65,419 |
|
|
|
58,199 |
|
Inventories |
|
|
38,073 |
|
|
|
35,139 |
|
Deferred income taxes |
|
|
25,892 |
|
|
|
21,764 |
|
Prepaid income taxes |
|
|
13,495 |
|
|
|
— |
|
Prepaid expenses and other |
|
|
6,761 |
|
|
|
5,969 |
|
Current assets of discontinued operations |
|
|
— |
|
|
|
96,070 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
637,380 |
|
|
|
418,095 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
34,683 |
|
|
|
36,448 |
|
Intangible assets, net |
|
|
15,963 |
|
|
|
13,110 |
|
Goodwill, net |
|
|
12,644 |
|
|
|
11,878 |
|
Other assets |
|
|
9,098 |
|
|
|
8,310 |
|
Non-current assets of discontinued operations |
|
|
— |
|
|
|
60,264 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
709,768 |
|
|
$ |
548,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders’ equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Account payable and accrued liabilities |
|
$ |
104,250 |
|
|
$ |
96,791 |
|
Dividends payable |
|
|
8,481 |
|
|
|
7,772 |
|
Income taxes payable |
|
|
— |
|
|
|
1,837 |
|
Short-term bank borrowings |
|
|
— |
|
|
|
14,000 |
|
Current liabilities of discontinued operations |
|
|
— |
|
|
|
29,971 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
112,731 |
|
|
|
150,371 |
|
|
|
|
|
|
|
|
|
|
Long-term accrued liabilities |
|
|
12,169 |
|
|
|
10,590 |
|
Convertible subordinated notes |
|
|
150,000 |
|
|
|
150,000 |
|
Non-current liabilities of discontinued operations |
|
|
— |
|
|
|
10,555 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
Common Stock, $.10 par value: |
|
|
|
|
|
|
|
|
Authorized - 150,000,000 shares; issued and outstanding
42,400,483 shares in 2007;
43,176,495 shares in 2006; |
|
|
4,240 |
|
|
|
4,318 |
|
Capital in excess of par value |
|
|
— |
|
|
|
36,726 |
|
Accumulated other comprehensive income |
|
|
11,342 |
|
|
|
16,498 |
|
Retained earnings |
|
|
419,286 |
|
|
|
169,047 |
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
434,868 |
|
|
|
226,589 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
709,768 |
|
|
$ |
548,105 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
53
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, |
|
| (in thousands, except per share data) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
301,974 |
|
|
$ |
268,272 |
|
|
$ |
251,726 |
|
Cost of sales |
|
|
78,656 |
|
|
|
69,209 |
|
|
|
64,576 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
223,318 |
|
|
|
199,063 |
|
|
|
187,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative |
|
|
120,080 |
|
|
|
100,962 |
|
|
|
86,351 |
|
Research and development |
|
|
35,021 |
|
|
|
29,036 |
|
|
|
25,234 |
|
Long-lived asset impairment and restructuring charges |
|
|
2,588 |
|
|
|
— |
|
|
|
1,665 |
|
Severance charges |
|
|
— |
|
|
|
— |
|
|
|
8,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157,689 |
|
|
|
129,998 |
|
|
|
121,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income from continuing operations |
|
|
65,629 |
|
|
|
69,065 |
|
|
|
65,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(6,178 |
) |
|
|
(5,690 |
) |
|
|
(5,093 |
) |
Interest income |
|
|
22,489 |
|
|
|
4,124 |
|
|
|
1,951 |
|
Other income |
|
|
232 |
|
|
|
186 |
|
|
|
506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
82,172 |
|
|
|
67,685 |
|
|
|
62,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
24,548 |
|
|
|
19,606 |
|
|
|
19,937 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
57,624 |
|
|
|
48,079 |
|
|
|
42,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of income taxes |
|
|
1,551 |
|
|
|
14,278 |
|
|
|
12,073 |
|
Gain on sale of discontinued operations, net of tax |
|
|
231,439 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
290,614 |
|
|
$ |
62,357 |
|
|
$ |
54,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
1.37 |
|
|
$ |
1.12 |
|
|
$ |
1.02 |
|
Discontinued operations |
|
$ |
5.55 |
|
|
$ |
0.33 |
|
|
$ |
0.29 |
|
Basic earnings per share |
|
$ |
6.93 |
|
|
$ |
1.45 |
|
|
$ |
1.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
1.24 |
|
|
$ |
1.01 |
|
|
$ |
0.93 |
|
Discontinued operations |
|
$ |
4.75 |
|
|
$ |
0.28 |
|
|
$ |
0.24 |
|
Diluted earnings per share |
|
$ |
5.99 |
|
|
$ |
1.29 |
|
|
$ |
1.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
0.74 |
|
|
$ |
0.71 |
|
|
$ |
0.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
41,960 |
|
|
|
42,995 |
|
|
|
41,921 |
|
Diluted |
|
|
49,092 |
|
|
|
50,870 |
|
|
|
49,667 |
|
See notes to consolidated financial statements.
54
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
| |
|
Common |
|
|
Common |
|
|
Capital in |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
| (in thousands, |
|
Shares |
|
|
Stock $.10 |
|
|
Excess of |
|
|
Deferred |
|
|
Comprehensive |
|
|
Retained |
|
|
|
|
| except per share data) |
|
Outstanding |
|
|
Par Value |
|
|
Par Value |
|
|
Compensation |
|
|
Income |
|
|
Earnings |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2004 |
|
|
42,059 |
|
|
$ |
4,206 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
16,822 |
|
|
$ |
174,976 |
|
|
$ |
196,004 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
54,881 |
|
|
|
54,881 |
|
Foreign currency
translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,887 |
|
|
|
— |
|
|
|
5,887 |
|
Unrealized loss on
investments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(175 |
) |
|
|
— |
|
|
|
(175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,593 |
|
Exercise of stock options |
|
|
1,028 |
|
|
|
103 |
|
|
|
11,435 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
11,538 |
|
Acceleration of options |
|
|
— |
|
|
|
— |
|
|
|
4,405 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,405 |
|
Income tax benefit from the
exercise of stock options |
|
|
— |
|
|
|
— |
|
|
|
7,184 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,184 |
|
Repurchase of common
stock |
|
|
(2,341 |
) |
|
|
(234 |
) |
|
|
(14,605 |
) |
|
|
— |
|
|
|
— |
|
|
|
(64,934 |
) |
|
|
(79,773 |
) |
Dividends declared
($.66 per share) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(27,424 |
) |
|
|
(27,424 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2005 |
|
|
40,746 |
|
|
$ |
4,075 |
|
|
$ |
8,419 |
|
|
$ |
— |
|
|
$ |
22,534 |
|
|
$ |
137,499 |
|
|
$ |
172,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
62,357 |
|
|
|
62,357 |
|
Foreign currency
translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6,157 |
) |
|
|
— |
|
|
|
(6,157 |
) |
Change in unrealized
loss on investments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
121 |
|
|
|
— |
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,321 |
|
Exercise of stock options |
|
|
3,149 |
|
|
|
315 |
|
|
|
43,334 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
43,649 |
|
Income tax benefit from the
exercise of stock options |
|
|
— |
|
|
|
— |
|
|
|
26,267 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
26,267 |
|
Issuance of restricted stock |
|
|
289 |
|
|
|
29 |
|
|
|
15,197 |
|
|
|
(15,226 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Forfeiture of restricted
stock |
|
|
(10 |
) |
|
|
(1 |
) |
|
|
(510 |
) |
|
|
511 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Amortization of restricted
grants |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,471 |
|
|
|
— |
|
|
|
— |
|
|
|
1,471 |
|
Repurchase of common
stock |
|
|
(998 |
) |
|
|
(100 |
) |
|
|
(42,737 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(42,837 |
) |
Dividends declared
($.71 per share) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(30,809 |
) |
|
|
(30,809 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2006 |
|
|
43,176 |
|
|
$ |
4,318 |
|
|
$ |
49,970 |
|
|
$ |
(13,244 |
) |
|
$ |
16,498 |
|
|
$ |
169,047 |
|
|
$ |
226,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(continued on next page)
55
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
| |
|
Common |
|
|
Common |
|
|
Capital in |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
| (in thousands, |
|
Shares |
|
|
Stock $.10 |
|
|
Excess of |
|
|
Deferred |
|
|
Comprehensive |
|
|
Retained |
|
|
|
|
| except per share data) |
|
Outstanding |
|
|
Par Value |
|
|
Par Value |
|
|
Compensation |
|
|
Income |
|
|
Earnings |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2006 |
|
|
43,176 |
|
|
$ |
4,318 |
|
|
$ |
49,970 |
|
|
$ |
(13,244 |
) |
|
$ |
16,498 |
|
|
$ |
169,047 |
|
|
$ |
226,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
290,614 |
|
|
|
290,614 |
|
Foreign currency
translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,247 |
) |
|
|
— |
|
|
|
(5,247 |
) |
Change in unrealized
gain (loss) on
investments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
91 |
|
|
|
— |
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
285,458 |
|
Exercise of stock options |
|
|
1,294 |
|
|
|
129 |
|
|
|
24,008 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
24,137 |
|
Income tax benefit from the
exercise of stock options |
|
|
— |
|
|
|
— |
|
|
|
11,870 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
11,870 |
|
Issuance of restricted stock |
|
|
210 |
|
|
|
21 |
|
|
|
(21 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Forfeiture of restricted
stock |
|
|
(91 |
) |
|
|
(9 |
) |
|
|
9 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Issuance of stock under
ESPP |
|
|
2 |
|
|
|
— |
|
|
|
70 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
70 |
|
Repurchase of common
stock |
|
|
(2,191 |
) |
|
|
(219 |
) |
|
|
(83,612 |
) |
|
|
— |
|
|
|
— |
|
|
|
(9,194 |
) |
|
|
(93,025 |
) |
Reclass related to adoption
of SFAS 123R |
|
|
— |
|
|
|
— |
|
|
|
(13,244 |
) |
|
|
13,244 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Stock based compensation
expense |
|
|
— |
|
|
|
— |
|
|
|
10,950 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10,950 |
|
Dividends declared
($.74 per share) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(31,181 |
) |
|
|
(31,181 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2007 |
|
|
42,400 |
|
|
$ |
4,240 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
11,342 |
|
|
$ |
419,286 |
|
|
$ |
434,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
56
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, |
|
| (in thousands) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
57,624 |
|
|
$ |
48,079 |
|
|
$ |
42,808 |
|
Adjustments to derive cash flows from continuing operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
7,198 |
|
|
|
7,748 |
|
|
|
7,296 |
|
Amortization |
|
|
2,495 |
|
|
|
2,274 |
|
|
|
1,977 |
|
Deferred income taxes |
|
|
4,889 |
|
|
|
793 |
|
|
|
(2,259 |
) |
Non-cash compensation |
|
|
10,950 |
|
|
|
1,471 |
|
|
|
4,406 |
|
Tax benefit from exercise of stock options |
|
|
11,870 |
|
|
|
26,267 |
|
|
|
7,184 |
|
Excess tax benefits from equity compensation |
|
|
(8,643 |
) |
|
|
— |
|
|
|
— |
|
Non-cash impairment of long-lived assets |
|
|
2,588 |
|
|
|
— |
|
|
|
186 |
|
Loss on sale of assets |
|
|
304 |
|
|
|
303 |
|
|
|
654 |
|
Loss (gain) on long-term marketable securities and investment write-downs, net |
|
|
(91 |
) |
|
|
121 |
|
|
|
20 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(7,576 |
) |
|
|
(2,136 |
) |
|
|
(2,854 |
) |
Inventories |
|
|
(2,658 |
) |
|
|
(2,293 |
) |
|
|
(3,908 |
) |
Other current assets |
|
|
(17,228 |
) |
|
|
(2,109 |
) |
|
|
(1,882 |
) |
Accounts payable and accrued liabilities |
|
|
9,063 |
|
|
|
19,618 |
|
|
|
9,988 |
|
Income taxes payable |
|
|
(1,837 |
) |
|
|
(1,092 |
) |
|
|
(1,025 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operating activities |
|
|
68,948 |
|
|
|
99,044 |
|
|
|
62,591 |
|
Net cash (used in) provided by discontinued operating activities |
|
|
(121,672 |
) |
|
|
25,354 |
|
|
|
34,509 |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(52,724 |
) |
|
|
124,398 |
|
|
|
97,100 |
|
Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(5,737 |
) |
|
|
(8,531 |
) |
|
|
(6,868 |
) |
Purchases of intangibles |
|
|
(6,741 |
) |
|
|
(1,543 |
) |
|
|
(507 |
) |
Purchases of marketable securities |
|
|
(77,999 |
) |
|
|
(295,439 |
) |
|
|
(150,720 |
) |
Sales of marketable securities |
|
|
64,396 |
|
|
|
229,461 |
|
|
|
122,855 |
|
Proceeds from the sale of the urology business |
|
|
455,348 |
|
|
|
— |
|
|
|
— |
|
Other, net |
|
|
429 |
|
|
|
— |
|
|
|
208 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) continuing investing activities |
|
|
429,696 |
|
|
|
(76,052 |
) |
|
|
(35,032 |
) |
Net cash used for discontinued investing activities |
|
|
(50 |
) |
|
|
(5,164 |
) |
|
|
(2,750 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
429,646 |
|
|
|
(81,216 |
) |
|
|
(37,782 |
) |
Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock |
|
|
(93,025 |
) |
|
|
(42,837 |
) |
|
|
(79,773 |
) |
Proceeds from exercise of stock options and ESPP |
|
|
24,207 |
|
|
|
43,649 |
|
|
|
11,539 |
|
Excess tax benefits from equity compensation |
|
|
8,643 |
|
|
|
— |
|
|
|
— |
|
Dividends paid |
|
|
(30,478 |
) |
|
|
(29,964 |
) |
|
|
(26,806 |
) |
Borrowings under line of credit agreements |
|
|
— |
|
|
|
14,000 |
|
|
|
— |
|
Repayments under line of credit agreements |
|
|
(14,000 |
) |
|
|
(970 |
) |
|
|
(4,854 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in continuing financing activities |
|
|
(104,653 |
) |
|
|
(16,122 |
) |
|
|
(99,894 |
) |
Net cash used in discontinued financing activities |
|
|
— |
|
|
|
(2,213 |
) |
|
|
(1,976 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(104,653 |
) |
|
|
(18,335 |
) |
|
|
(101,870 |
) |
Effect of currency exchange rates on cash and cash equivalents |
|
|
663 |
|
|
|
(780 |
) |
|
|
648 |
|
Effect of currency exchange rates of discontinued operations |
|
|
(120 |
) |
|
|
(2,020 |
) |
|
|
345 |
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
272,812 |
|
|
|
22,047 |
|
|
|
(41,559 |
) |
Cash and cash equivalents at beginning of year |
|
|
98,713 |
|
|
|
76,666 |
|
|
|
118,225 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
371,525 |
|
|
$ |
98,713 |
|
|
$ |
76,666 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes for continuing operations |
|
$ |
19,927 |
|
|
$ |
4,601 |
|
|
$ |
20,325 |
|
Interest for continuing operations |
|
$ |
4,822 |
|
|
$ |
4,522 |
|
|
$ |
4,015 |
|
See notes to consolidated financial statements.
57
MENTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
Note A — Summary of Significant Accounting Policies
Business Activity
Mentor Corporation was incorporated in April 1969. Unless the context indicates otherwise, when we
refer to “Mentor,” “we,” “us,” “our,” or the “Company” in these notes, we are referring to Mentor
Corporation and its subsidiaries on a consolidated basis. The Company
develops, manufactures, licenses and
markets a range of products serving the aesthetic market, including plastic and reconstructive
surgery. Historically the Company’s products have been utilized by three primary segments:
aesthetic and general surgery (plastic and reconstructive surgery), surgical urology, and clinical
and consumer healthcare. Aesthetic and general surgery products include surgically implantable
breast implants for plastic and reconstructive surgery, capital equipment and consumables used for
soft tissue aspiration or body contouring (liposuction), and facial
rejuvenation products including various types of products for skin
restoration. On June
2, 2006, the Company completed a transaction for the sale of our surgical urology and clinical and
consumer healthcare businesses (together referred to as the Urology Business) to Coloplast A/S
(“Coloplast”). The surgical urology products included surgically implantable prostheses for the
treatment of impotence, surgically implantable incontinence products, urinary care products, and
brachytherapy seeds for the treatment of prostate cancer. The clinical and consumer healthcare
products included catheters and other products for the management of urinary incontinence and
retention.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all of its
subsidiaries in which a controlling interest is maintained. All
intercompany accounts and transactions have been eliminated.
Certain prior year amounts in previously issued financial statements have been reclassified to
conform to the current year presentation. The March 31, 2006
balance sheet includes a $2.6 million
reclassification from intangibles to goodwill and an $8.7 million reduction to deferred warranty
costs included in prepaids and other assets, offset by an equivalent reduction in short and
long-term warranty reserves.
Cash Equivalents and Marketable Securities
All highly liquid investments with maturities of three months or less at the date of purchase are
considered to be cash equivalents.
The Company considers its marketable securities available-for-sale as defined in SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity Securities.” 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. Available-for-sale securities are
reported at fair market value. Unrealized gains and losses are excluded from income, but, instead
are reported as a net amount in Accumulated Other Comprehensive Income in Shareholders’ Equity.
The Company’s short-term marketable securities consist primarily of state and municipal government
and government agency obligations, Federal Home Loan Bank and Mortgage Association bonds, and
investment-grade corporate obligations, including commercial paper.
58
Available-for-sale investments at March 31, 2007 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
| |
|
Adjusted |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
| (in thousands) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash balances |
|
$ |
146,552 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
146,552 |
|
Money market funds |
|
|
224,973 |
|
|
|
— |
|
|
|
— |
|
|
|
224,973 |
|
U.S. Government and Agency |
|
|
23,923 |
|
|
|
34 |
|
|
|
(3 |
) |
|
|
23,954 |
|
State and Municipal Agency obligations |
|
|
92,261 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
92,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale investments |
|
$ |
487,709 |
|
|
$ |
35 |
|
|
$ |
(4 |
) |
|
$ |
487,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in cash and cash equivalents |
|
$ |
371,525 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
371,525 |
|
Included in current marketable securities |
|
|
116,184 |
|
|
|
35 |
|
|
|
(4 |
) |
|
|
116,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale investments |
|
$ |
487,709 |
|
|
$ |
35 |
|
|
$ |
(4 |
) |
|
$ |
487,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale investments at March 31, 2006 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
| |
|
Adjusted |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
| (in thousands) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash balances |
|
$ |
95,054 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
95,054 |
|
Money market funds |
|
|
3,659 |
|
|
|
— |
|
|
|
— |
|
|
|
3,659 |
|
State and Municipal agency obligations |
|
|
71,374 |
|
|
|
— |
|
|
|
— |
|
|
|
71,374 |
|
Mortgage-backed securities |
|
|
30,667 |
|
|
|
— |
|
|
|
(85 |
) |
|
|
30,582 |
|
Corporate debt securities |
|
|
286 |
|
|
|
— |
|
|
|
(1 |
) |
|
|
285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale investments |
|
$ |
201,040 |
|
|
$ |
— |
|
|
$ |
(86 |
) |
|
$ |
200,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in cash and cash equivalents |
|
$ |
98,713 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
98,713 |
|
Included in current marketable securities |
|
|
102,327 |
|
|
|
— |
|
|
|
(86 |
) |
|
|
102,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale investments |
|
$ |
201,040 |
|
|
$ |
— |
|
|
$ |
(86 |
) |
|
$ |
200,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our debt securities include U.S. Government and Agency obligations with maturities within one year
and State and Municipal Agency obligations with maturities ranging between five and ten years.
Fair Values of Financial Instruments
The fair value of available-for-sale investments is based on quoted market prices. The fair values
of cash equivalents, accounts receivable and accounts payable approximate their carrying value due
to the short-term nature of these financial instruments.
Concentrations and Credit Risk
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 in raw material supply occurred during fiscal 2007.
The Company grants credit terms in the normal course of business to its customers, primarily
hospitals, doctors and distributors. The Company performs ongoing credit evaluations of its
customers and adjusts credit limits based upon payment history and the customers’ current credit
worthiness, as determined through review of their current credit information. The Company
regularly monitors collections and payments from customers and
maintains allowances for doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. Estimated losses are based on historical experience and any
specific customer collection issues identified. Bad debts have been minimal. The Company does not
normally require collateral or other security to support credit sales. No customer accounted for
more than 10% of the Company’s revenues or accounts receivable balance for any periods presented.
59
Revenue Recognition
The Company recognizes product revenue, net of discounts, returns, and rebates in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 48, “Revenue Recognition When the Right of
Return Exists,” and Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.” As required
by these standards, revenue is recorded when persuasive evidence of a sales arrangement exists,
delivery has occurred, the buyer’s price is fixed or determinable, contractual obligations have
been satisfied, and collectibility is reasonably assured. These requirements are met, and sales
and related cost of sales are recognized upon the shipment of products, or in the case of
consignment inventories, upon the notification of usage by the customer. The Company records
estimated reductions to revenue for customer programs and other volume-based incentives. Should
the actual level of customer participation in these programs differ from those estimated,
additional adjustments to revenue may be required. The Company also allows credit for products
returned within its policy terms. The Company records an allowance for estimated returns at the
time of sale based on historical experience, recent gross sales levels and any notification of
pending returns. Should the actual returns differ from those estimated, additional adjustments to
revenue and cost of sales may be required.
The Company has current and long-term deferred revenue, which include funds received in connection
with purchases of the Company’s Enhanced Advantage Breast Implant Limited Warranty program. The
fees received in connection with the Enhanced Advantage Breast Implant Limited Warranty are
deferred and recognized evenly over the life of the warranty term.
Inventories
Inventories are stated at the lower of cost or market, cost determined by the first-in, first-out
(“FIFO”) method. The Company writes down its inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions.
Property and Equipment
Property and equipment is stated at cost. 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 useful lives ranging from 3 to 15 years 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, trademarks and other
intangibles. These are stated at cost less accumulated amortization and are amortized over their
economic useful life ranging from 3 to 20 years using the straight-line method. Goodwill
represents the excess purchase cost over fair value of net identifiable assets acquired. The
Company evaluates goodwill and other intangibles annually in the fourth quarter of each fiscal
year, and has determined that its reporting units may be aggregated
to its single business segment for purposes of this test. The impairment tests involve the use of both estimates of fair value as well as cash flow assumptions. If the book value exceeds the fair value, then
the net book value would be reduced to fair value.
60
Warranty Reserves
The
Company offers two types of warranties relating to its breast
implants in the United States and
Canada: a standard limited warranty which is offered at no additional charge and
an enhanced limited warranty, generally at an additional charge of $100 in the U.S. ($100 CAD in
Canada), both of which provide limited financial assistance in the event of a deflation or rupture.
The Company’s standard limited warranty is also offered in certain European and other
international countries for silicone gel-filled breast implants. During the fourth quarter of
fiscal 2007, we began a limited-time offer of free enrollment in our Enhanced Advantage Limited
Warranty for MemoryGel™ implants implanted after February 15, 2007, in the U.S. The Company
provides an accrual for the estimated cost of the standard and/or free limited breast implant
warranties at the time revenue is recognized. The
cost of the enhanced limited warranty, when sold at an additional
charge to the customer, is recognized as costs are incurred. Costs related to warranties are recorded in cost of
sales. The accrual for the
standard and/or free limited warranty is based on estimates, which are based on relevant factors such as unit
sales, historical experience, the limited warranty period, estimated costs, and, to a limited
extent, information developed using actuarial techniques. The
accrual is analyzed periodically for adequacy. While the Company engages in extensive product
quality programs and processes, including actively monitoring and evaluating the quality of our
component suppliers, the warranty obligation is affected by reported rates of warranty claims and
levels of financial assistance specified in the limited warranties. Should actual patient claim
rates reported differ from our estimates and/or changes in claim
rates result in revised actuarial assumptions, adjustments to the estimated warranty liability may be
required. These adjustments would be included in cost of sales. The Company’s warranty programs
may be modified in the future in response to the competitive market environment. Such changes may
impact the amount and timing of the associated revenue and expense for these programs.
Product Liability Reserves
The Company has product liability reserves for product-related claims to the extent those claims
may result in litigation expenses, settlements or judgments within our self-insured retention
limits. The Company has also established additional reserves, through its wholly-owned captive
insurance company, for estimated liabilities for product-related claims based on actuarially
determined estimated liabilities taking into account its excess insurance coverages. The actuarial
valuations are based on historical information and certain assumptions about future events.
Product liability costs are recorded in selling, general and administrative expenses as they are
directly under the control of our General Counsel and other general and administrative staff and
are directly impacted by the Company’s overall risk management strategy. Should actual product
liability experience differ from the estimates and assumptions used to develop these reserves,
subsequent changes in reserves will be recorded in selling, general and administrative expenses,
and may affect the Company’s operating results in future periods.
Employee Stock-Based Payments
The Company has employee compensation plans under which various types of stock-based instruments
have been granted. These instruments principally include stock options, restricted stock and
performance units. As of March 31, 2007, these plans have instruments outstanding that might
require the issuance of 2.9 million shares of common stock to our employees. Stock-based awards
under the Company’s employee compensation plans are made with authorized but unissued shares
reserved for this purpose.
Prior to April 1, 2006, the Company accounted for the Company’s employee stock-based compensation
under the recognition and measurement principles of Accounting Principles Board Opinion (“APB”) No.
25, “Accounting for Stock Issued to Employees,” and related Interpretations, as permitted by
Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based
Compensation”. Under the recognition principles of APB No. 25, compensation expense related to
restricted stock and performance units was recognized in the Company’s financial statements.
However, APB No. 25 generally did not require the recognition of compensation expense for the
Company’s stock options because the exercise price of these instruments was equal to the market
value of the underlying common stock on the date of grant, and the related number of shares granted
were fixed at that point in time.
Effective April 1, 2006, the Company adopted the fair value recognition provisions of
SFAS 123(R), “Share-Based Payment”. In addition to recognizing compensation expense related to
restricted stock and performance
units, SFAS 123(R) also requires us to recognize compensation expense related to the estimated
fair value of stock options and other equity based compensation instruments. The Company adopted
SFAS 123(R) using the modified-prospective-transition method. Under that transition method,
compensation expense recognized subsequent to adoption includes: (a) compensation cost for all
share-based payments granted prior to, but not yet
vested, as of April 1, 2006, based on the values estimated in accordance with the original
provisions of SFAS 123, and (b) compensation cost for all share-based payments granted
subsequent to April 1, 2006 based on the grant-date fair values estimated in accordance with the
provisions of SFAS 123(R). Consistent with the modified-prospective-transition method, the
Company’s results of operations for prior periods have not been adjusted to reflect the adoption of
SFAS 123(R).
61
Income Taxes
Deferred income taxes are provided on the temporary differences between income for financial
statement and tax purposes. The Company has not recorded a valuation allowance on its deferred tax
assets as management believes that it is more likely than not that all deferred tax assets will be
realized.
Our income tax returns are routinely audited by the Internal Revenue Service and various state and
foreign tax authorities. Disputes may arise with these tax authorities involving issues of the
timing and amount of deductions and allocations of income among various tax jurisdictions because
of differing interpretations of tax laws and regulations. We periodically evaluate our exposures
associated with tax filing positions. While we believe our positions comply with applicable laws,
we record liabilities based upon estimates of the ultimate outcomes of these matters.
Advertising Expenses
The Company expenses media advertising costs as incurred or where applicable, upon first showing.
Advertising expenses were $1.8 million, $3.0 million and $3.9 million in fiscal 2007, 2006 and
2005, respectively. There were no capitalized advertising costs at March 31, 2007 and 2006. At
March 31, 2005 there was $1.1 million of capitalized advertising costs.
Foreign Operations
Export sales to independent distributors were $6.4 million, $7.2 million and $6.5 million in fiscal
2007, 2006 and 2005, respectively. In addition, $77.3 million, $68.3 million, and $58.8 million of
net sales from continuing operations in fiscal 2007, 2006 and 2005, respectively, were from the
Company’s direct international sales offices primarily in Canada and Europe.
Foreign Currency Translation
The financial statements of the Company’s non-U.S. subsidiaries are translated into U.S. dollars in
accordance with SFAS No. 52, “Foreign Currency Translation.” The assets and liabilities of certain
non-U.S. subsidiaries whose functional currencies are other than the U.S. dollar are translated at
current rates of exchange. Revenue and expense items are translated at the average exchange rate
for the year. The resulting translation adjustments are recorded directly into accumulated other
comprehensive income (loss). Transaction gains and losses, other than intercompany debt deemed to
be of a long-term nature, are included in net income in the period they occur.
Effects of Recent Accounting Pronouncements
In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin
108, “Considering the Effects on Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements,” (“SAB 108”). SAB 108 requires registrants to quantify errors using
both the income statement method (i.e. iron curtain method) and the rollover method and requires
adjustment if either method indicates a material error. If a correction in the current year
relating to prior year errors is material to the current year, then the prior year financial
information needs to be corrected. A correction to prior year results that is not material to
those years would not require a “restatement process” where prior financials would be amended. SAB
108 is effective for fiscal years ending after November 15, 2006. The requirements of SAB 108 did
not have a material effect on the Company’s consolidated financial statements.
62
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements.” This statement defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles
and expands disclosure about fair value measurements. This statement applies under other
accounting pronouncements that require or permit fair value measurements. Accordingly, this
statement does not require any new fair value measurements. This statement is effective for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal years. The
Company is currently evaluating the requirements of SFAS No. 157 and has not yet determined the
impact on the Company’s consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in
Income Taxes — an interpretation of FASB Statement No. 109” which prescribes a recognition
threshold and measurement process for recording in the financial statements uncertain tax positions
taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on
derecognition, classification, accounting in interim periods, and disclosure requirements for
uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006.
The Company is currently assessing the impact of FIN 48 on its consolidated financial position and
results of operations.
In February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments -
an amendment of FASB Statements No. 133 and 140” (“SFAS 155”). This statement amends SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), and SFAS No. 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”,
and resolves issues addressed in SFAS 133 Implementation Issue No. D1, “Application of Statement
133 to Beneficial Interest in Securitized Financial Assets.” This Statement: (a) permits fair
value remeasurement for any hybrid financial instrument that contains an embedded derivative that
otherwise would require bifurcation; (b) clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS 133; (c) establishes a requirement to evaluate
beneficial interests in securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded derivative requiring
bifurcation; (d) clarifies that concentrations of credit risk in the form of subordination are not
embedded derivatives; and (e) eliminates restrictions on a qualifying special-purpose entity’s
ability to hold passive derivative financial instruments that pertain to beneficial interests that
are or contain a derivative financial instrument. The standard also requires presentation within
the financial statements that identifies those hybrid financial instruments for which the fair
value election has been applied and information on the income statement impact of the changes in
fair value of those instruments. The Company is required to apply SFAS 155 to all financial
instruments acquired, issued or subject to a remeasurement event beginning April 1, 2007, although
early adoption is permitted as of the beginning of an entity’s fiscal year. The Company is
evaluating the provisions of SFAS 155 and has not yet determined the impact on the Company’s
consolidated financial statements.
In June 2006, FASB ratified Emerging Issues Task Force (EITF) Issue 06-3, “How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That Is, Gross versus Net Presentation)”. EITF 06-3 requires a company to disclose its accounting
policy (i.e., gross or net presentation) regarding the presentation of taxes within the scope of
EITF 06-3. If taxes are significant, a company should disclose the amount of such taxes for each
period for which an income statement is presented. The guidance is effective for periods beginning
after December 15, 2006. The adoption of EITF 06-3 is not expected to result in a change to the
Company’s accounting policy or have an effect on the Company’s consolidated financial statements.
In February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Liabilities — Including an amendment of FASB Statement No. 115 (“FAS 159”). FAS 159 permits
entities to choose to measure certain financial assets and liabilities at fair value. Unrealized
gains and losses, arising subsequent to adoption, are reported in earnings. The Company is required
to adopt FAS 159 for the first fiscal year beginning after November 15, 2007. The Company is
currently evaluating if it will elect the fair value option for any of its eligible financial
instruments and other items.
63
Use of Estimates
Financial statements prepared in accordance with accounting principles generally accepted in the
United States require management to make estimates and judgments that affect amounts and
disclosures reported in the financial statements. Actual results could differ from those
estimates.
Note B — Inventories
Inventories at March 31 consisted of:
| |
|
|
|
|
|
|
|
|
| (in thousands) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
5,924 |
|
|
$ |
3,994 |
|
Work in process |
|
|
4,961 |
|
|
|
5,382 |
|
Finished goods on consignment |
|
|
13,402 |
|
|
|
11,052 |
|
Finished goods |
|
|
13,786 |
|
|
|
14,711 |
|
|
|
|
|
|
|
|
|
|
$ |
38,073 |
|
|
$ |
35,139 |
|
|
|
|
|
|
|
|
Note C — Property and Equipment
Property and equipment at March 31 consisted of:
| |
|
|
|
|
|
|
|
|
| (in thousands) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
Land |
|
$ |
55 |
|
|
$ |
55 |
|
Buildings |
|
|
10,853 |
|
|
|
10,053 |
|
Leasehold improvements |
|
|
23,099 |
|
|
|
21,952 |
|
Furniture, fixtures and equipment |
|
|
59,708 |
|
|
|
60,004 |
|
Construction in progress |
|
|
4,217 |
|
|
|
3,481 |
|
|
|
|
|
|
|
|
|
|
|
97,932 |
|
|
|
95,545 |
|
Less accumulated depreciation and amortization |
|
|
(63,249 |
) |
|
|
(59,097 |
) |
|
|
|
|
|
|
|
|
|
$ |
34,683 |
|
|
$ |
36,448 |
|
|
|
|
|
|
|
|
Note D — Other Comprehensive Income
Other comprehensive income includes the net change in unrealized gains (losses) on
available-for-sale securities as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, |
|
| (in thousands) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) arising during period,
net of taxes of $0, $217 and $137, respectively |
|
$ |
32 |
|
|
$ |
(403 |
) |
|
$ |
(386 |
) |
Reclassification adjustments for gains (losses)
realized in net income, net of taxes of $27,
$282 and $115, respectively |
|
|
59 |
|
|
|
524 |
|
|
|
211 |
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on securities |
|
$ |
91 |
|
|
$ |
121 |
|
|
$ |
(175 |
) |
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income which is included in the Company’s shareholders’ equity at
March 31 consisted of:
| |
|
|
|
|
|
|
|
|
| (in thousands) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
Net unrealized (losses) gains on securities |
|
$ |
32 |
|
|
$ |
(59 |
) |
Foreign currency translation adjustments |
|
|
11,310 |
|
|
|
16,557 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
11,342 |
|
|
$ |
16,498 |
|
|
|
|
|
|
|
|
64
Note E — Accounts Payable and Accrued Liabilities and Long-Term Accrued Liabilities
Accounts payable and accrued liabilities at March 31 consisted of:
| |
|
|
|
|
|
|
|
|
| (in thousands) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
Trade accounts payable |
|
$ |
32,147 |
|
|
$ |
27,685 |
|
Sales returns |
|
|
18,590 |
|
|
|
15,544 |
|
Accrued compensation |
|
|
14,022 |
|
|
|
17,335 |
|
Deferred revenue |
|
|
11,863 |
|
|
|
10,495 |
|
Product liability reserve |
|
|
6,555 |
|
|
|
6,701 |
|
Warranty reserves |
|
|
2,989 |
|
|
|
3,907 |
|
Interest payable |
|
|
1,031 |
|
|
|
1,031 |
|
Accrued royalties |
|
|
230 |
|
|
|
274 |
|
Other |
|
|
16,823 |
|
|
|
13,819 |
|
|
|
|
|
|
|
|
|
|
$ |
104,250 |
|
|
$ |
96,791 |
|
|
|
|
|
|
|
|
Long-term accrued liabilities at March 31 consisted of:
| |
|
|
|
|
|
|
|
|
| (in thousands) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
Warranty reserves |
|
$ |
11,319 |
|
|
$ |
9,696 |
|
Other |
|
|
850 |
|
|
|
894 |
|
|
|
|
|
|
|
|
|
|
$ |
12,169 |
|
|
$ |
10,590 |
|
|
|
|
|
|
|
|
Note F — Short-Term Bank Borrowings
Credit Agreement
On May 26, 2005, the Company entered into a Credit Agreement (the “Credit Agreement”) that provides
a $200 million senior revolving credit facility, subject to a $20 million sublimit for the issuance
of standby and commercial letters of credit, a $10 million sublimit for swing line loans and a $50
million alternative currency sublimit. The Credit Agreement expires on September 30, 2008. At the
election of the Company, and subject to lender approval, the amount available for borrowings under
the Credit Agreement may be increased by an additional $50 million. Funds under the Credit
Agreement are available to the Company to finance permitted acquisitions, for stock repurchases up
to certain dollar limitations, and for other general corporate purposes.
During the quarter ended June 30, 2006, the Company entered into an Amendment to the Credit
Agreement (“First Amendment”) to permit the Company to consummate the sale of its surgical urology
and clinical and consumer health care segments. Additionally, the First Amendment releases urology
subsidiaries as guarantors, releases the pledges of the capital stock of urology subsidiaries,
modified the minimum EBITDA, modifies certain covenants restricting the Company to enter into
certain investments, incur indebtedness and increased the amount of its equity securities the
Company is allowed to repurchase.
On March 30, 2007, the Company amended the Credit Agreement a second time. The amendment permits
the Company to declare or pay annual dividends up to $0.90 per share and repurchase up to an
aggregate of $400 million worth of its common stock after March 30, 2007. The Company has three
standby letters of credit totaling $2 million outstanding which are secured by the Credit
Agreement. Accordingly, although there were no borrowings outstanding under the Credit Agreement
at March 31, 2007, only $198 million was available for borrowings.
Interest on borrowings (other than swing line loans) under the Credit Agreement is at a variable
rate that is calculated, at the Company’s option, at either prime rate or LIBOR, plus an additional
percentage that varies depending on the Company’s senior leverage ratio (as defined in the Credit
Agreement) at the time of the borrowing. Swing line loans bear interest at the prime rate plus
additional basis points, depending on the Company’s senior leverage ratio at the time of the loan.
In addition, the Company paid certain fees to the lenders to initiate the Credit Agreement and
pays an unused commitment fee based on the Company’s senior leverage ratio and unborrowed lender
commitments.
65
Borrowings under the Credit Agreement
are guaranteed by certain of the Company’s domestic subsidiaries
and are also secured by a pledge of 100% of the outstanding capital
stock of certain other domestic subsidiaries. In addition, if
the ratio of total funded debt to adjusted EBITDA exceeds 2.50 to 1.00, the Company is obligated to
grant to the lenders a first priority perfected security interest in essentially all of its
domestic assets.
The Credit Agreement imposes certain financial and operational restrictions on the Company and its
subsidiaries, including financial covenants that require the Company to maintain a maximum
consolidated funded debt leverage ratio of not greater than 4.00 to 1.00, a senior funded debt
ratio of not greater than 2.50 to 1.00, minimum quarterly EBITDA, and a minimum fixed charge ratio
of greater than 1.25 to 1.00. The covenants also restrict the Company’s ability, among other
things, to make certain investments, incur certain types of indebtedness or liens, make
acquisitions in excess of $20 million except in compliance with certain criteria, and repurchase
shares of common stock, pay dividends or dispose of assets above specified thresholds. The Credit
Agreement also contains customary events of default, including payment defaults, material
inaccuracies in its representations and warranties, covenant defaults, bankruptcy and involuntary
proceedings, monetary judgment defaults in excess of specified amounts, cross-defaults to certain
other agreements, change of control, and ERISA defaults. If an event of default occurs and is
continuing, the commitments under the Credit Agreement may be terminated and the principal amount
and all accrued but unpaid interest and other amounts owed thereunder may be declared immediately
due and payable. As of March 31, 2007, all covenants and restrictions had been satisfied, and
there were no borrowings outstanding under the Credit Agreement.
Loan and Overdraft Facility
On October 4, 2005, Mentor Medical Systems B.V., (“Mentor BV”), a wholly-owned subsidiary of Mentor
Corporation, entered into a Loan and Overdraft Facility (the “Facility”) with Cooperative RaboBank
Leiden, Leiderdorp en Oestgstgeest U.A. (“RaboBank”).
The Facility provides Mentor BV with an initial €15 million loan and overdraft facility, which
began decreasing by €375,000 quarterly in September 2006. Under the Facility, Mentor BV may
borrow up to €12.5 million in fixed amount advances, with terms of three to six months, and a
further sublimit of up to €5 million of loans in fixed amount advances with a term of up to 5
years. Up to €10 million of the Facility may be drawn in the form of U.S. Dollars. Funds under
the Facility are available to Mentor BV to finance certain dividend payments to Mentor Corporation
and for other normal business purposes. As of March 31, 2007, there was no outstanding balance
under this credit facility, and accordingly, $18.5 million was available for borrowing.
Interest on borrowings under the Facility is at a rate equal to 0.55% over the RaboBank base
lending rate, Euribor, or LIBOR depending upon the currency and term of each borrowing. Interest
rates on borrowings other than overdrafts are fixed for the term of the advance. Borrowings by
Mentor BV under the Facility are guaranteed by Mentor’s wholly-owned subsidiary, Mentor Medical
Systems C.V., through a Joint and Several Debtorship agreement. In addition, borrowings under the
Facility are secured by certain real estate owned by Mentor BV.
The Facility imposes certain financial and operational restrictions on Mentor BV, including
financial covenants that require Mentor BV and Mentor Medical Systems CV to maintain a minimum
combined defined solvency ratio, a maximum combined debt leverage ratio of not greater than 4 to 1,
a senior funded debt ratio of not greater than 2.5 to 1, minimum quarterly operational results, and
a minimum interest coverage ratio of greater than 5 to 1. The Facility also contains customary
events of default, including cross default and material or adverse change provisions. If an event
of default occurs, the commitments under the Facility may be terminated and the principal amount
and all accrued but unpaid interest and other amounts owed thereunder may be declared immediately
due and payable. As of March 31, 2007, all covenants and restrictions were satisfied.
Mentor BV paid €15,000 in certain fees to the RaboBank upon entry into the Facility, and Mentor
BV will be obligated to pay, over the 10-year term of the Facility, a commitment fee of 0.25% of
the committed and unborrowed balances. Fees are payable quarterly in arrears.
At March 31, 2007, there were no
outstanding borrowings under all credit agreements. At March 31, 2006, outstanding borrowings
under all credit agreements were $14 million and had a weighted-average interest rate of
5.49%. A total of $216.5 million and $202.2 million was available under the senior revolving credit
facility and foreign lines of credit at March 31, 2007 and 2006, respectively.
66
Note G — Stock Options, Restricted Stock and Employee Stock Purchase Plan
Employee Stock Purchase Plan
On September 14, 2005, the Company’s Board of Directors approved its Employee Stock Purchase Plan
(“ESPP”). The ESPP is intended to assist the Company in securing and retaining its employees by
allowing them to participate in the ownership and growth of the Company through the grant of
certain rights to purchase shares of the Company’s common stock at an initial discount of 5% from
the fair market value of its shares. The granting of such rights serves as partial consideration
for employment and gives employees an additional inducement to remain in the service of the Company
and its subsidiaries and provides them with an increased incentive to work toward the Company’s
success.
Under the ESPP, each eligible employee is permitted to purchase shares of common stock through
regular payroll deductions and/or cash payments in amounts ranging from 1% to 15% of the employee’s
compensation for each payroll period. The fair market value of the shares of common stock which may
be purchased by any employee under this or any other plan of the Company is intended to comply
with Section 423 of the Internal Revenue Code.
The ESPP provides for a series of consecutive offering periods that are three months long
commencing on each Grant Date. Offering periods commence on January 1, April 1, July 1 and October
1 of each year. During each offering period, participating employees are able to purchase shares
of common stock at a purchase price equal to 95% of the fair market value of the common stock at
the end of each offering period. Under terms of the ESPP, 400,000 shares of common stock have been
reserved for issuance to employees. As of March 31, 2007, approximately 2,000 shares have been
sold under the plan.
The Company’s Long-Term Incentive Plans
The Company has granted options to key employees and non-employee directors under its Amended 2000
Long-Term Incentive Plan (the “2000 Plan”) and its 1991 Plan. In addition, in September 2005, the
Company’s shareholders approved an amended and restated version of the Company’s Amended 2000
Long-Term Incentive Plan, which is now referred to as the Mentor Corporation 2005 Long-Term
Incentive Plan and which was further amended in November 2005 (as amended, the “2005 Plan”). In
September 2006, the Company’s shareholders approved an amendment to the 2005 Plan to increase the
number of shares of the Company’s common stock available for award grants under the plan by
1,600,000 shares with the new aggregate share limit for the 2005 Plan at 7,600,000 shares. Options
granted under each of the Company’s plans vest in four equal annual installments beginning one year
from the date of grant, and expire ten years from the date of grant. At March 31, 2007, the
Company had one plan under which stock options were available for future grants, the 2005 Plan.
Pursuant to the terms of the option plans, 1.3 million shares were issued pursuant to exercises
during fiscal 2007.
The 2005 Plan reflects, among other things, amendments to the earlier plans to (i) provide the
Company with flexibility to grant awards other than stock options, including but not limited to
restricted stock, stock bonuses, stock units and dividend equivalents; (ii) allow the Company to
grant awards intended to qualify as performance-based compensation within the meaning of Section
162(m) of the U.S. Internal Revenue Code; and (iii) extend the term of the plan to July 24, 2015.
Following the November 2005 amendments, the 2005 Plan provides as follows:
Grants of full-value awards under the 2005 Plan generally must satisfy certain minimum
vesting requirements. (“Full-value awards” include all awards granted under the 2005 Plan
other than stock options with an exercise price that is not less than the fair market value
of the underlying stock on the date the option is granted.) Full-value awards subject to
time-based vesting may not become fully vested in less than three years. Full-value awards
subject to performance-based vesting may not vest in less than
one year. The Company retains discretion to accelerate vesting of such awards under certain
circumstances, such as in connection with a termination of the grantee’s employment, a
change in control of the Company or the grantee’s employer, or a release of claims by the
grantee. The Company may also grant full-value awards covering up to 10% of the total
number of shares available for grant purposes under the 2005 Plan that are not subject to
the foregoing vesting and acceleration restrictions.
Shareholder approval is expressly required for any increase in the number of shares of the
Company’s common stock that are available for award grant purposes under the 2005 Plan.
67
Persons eligible to receive awards under the 2005 Plan include directors, officers or employees of
the Company, and certain of its consultants and advisors. The types of awards that may be granted
under the 2005 Plan include stock options, restricted stock, stock bonuses, stock units and
dividend equivalents, and other forms of awards granted or denominated in the Company’s common
stock or units of the Company’s common stock, as well as certain cash bonus awards.
On October 5, 2005 (the “Award Date”), the Compensation Committee of the Board of Directors of the
Company granted awards in the aggregate amount of 288,856 restricted shares of Company common stock
(the “Restricted Stock”) to the Company’s Executive and other officers, and to members of the Board
of Directors. Similarly, 209,960 restricted shares were granted in this fiscal year. The
Restricted Stock vests, and restrictions lapse, with respect to one-fifth of the total number of
shares of Restricted Stock on each of the first, second, third, fourth and fifth anniversaries of
the Award Date. The vesting schedule requires continued employment or service through each
applicable vesting date as a condition to the vesting of the applicable installment of
the Restricted Stock, and carries specific share holding requirements during such employment or
service. Stock compensation expense is recognized over the 5-year vesting period of the Restricted
Stock grants. Restricted Stock compensation expense for fiscal 2007 and fiscal 2006 was $4.9 and
$1.5 million, respectively. There was no Restricted Stock compensation expense in fiscal 2005.
Prior to April 1, 2006, the Company accounted for its employee stock-based compensation under the
recognition and measurement principles of Accounting Principles Board Opinion (“APB”) No. 25,
“Accounting for Stock Issued to Employees,” and related Interpretations, as permitted by SFAS No.
123, “Accounting for Stock-Based Compensation”. Under the recognition principles of APB No. 25,
compensation expense related to restricted stock and performance units was required to be
recognized in our financial statements. Because none were issued prior to April 2006, no expense
was recognized. Generally, APB No. 25 did not require the recognition of compensation expense for
our stock options because the exercise price of these instruments was generally equal to the market
value of the underlying common stock on the date of grant, and the related number of shares granted
were fixed at that point in time.
Exercise prices for stock options are set at fair market value, as determined by the closing price
of the Company’s common stock on the New York Stock Exchange on the date of grant, and the related
number of shares granted is fixed at that point in time. Therefore, under the principles of APB
Opinion 25, the Company did not recognize compensation expense associated with the grant of stock
options. SFAS 123 “Accounting for Stock-Based Compensation” required 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 were determined as if
the Company had accounted for its employee stock options under the fair value method of that
statement. For purposes of pro forma disclosure, the estimated fair value of the options would be
amortized ratably over the options’ vesting period.
68
Pro Forma Analysis under SFAS 123
The Company’s pro forma information reported in years prior to its adoption of SFAS 123(R) is as
follows:
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, |
|
| (in thousands, except per share data) |
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
Net income from continuing operations: as reported1 |
|
$ |
48,079 |
|
|
$ |
42,808 |
|
Deduct: compensation expense fair value method |
|
|
(3,900 |
) |
|
|
(5,864 |
) |
|
|
|
|
|
|
|
Net income: pro forma |
|
$ |
44,179 |
|
|
$ |
36,944 |
|
|
|
|
|
|
|
|
|
|
Basic earnings per share from continuing operations: as reported |
|
$ |
1.12 |
|
|
$ |
1.02 |
|
Basic earnings per share from continuing operations: pro forma |
|
$ |
1.02 |
|
|
$ |
0.88 |
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations: as reported1 |
|
$ |
48,079 |
|
|
$ |
42,808 |
|
Add back after tax interest expense on convertible notes |
|
|
3,208 |
|
|
|
3,208 |
|
|
|
|
|
|
|
|
Net income: diluted earnings per share |
|
|
51,287 |
|
|
|
46,016 |
|
Deduct: compensation expense fair value method |
|
|
(3,900 |
) |
|
|
(5,864 |
) |
|
|
|
|
|
|
|
Net income: diluted earnings per share pro forma |
|
$ |
47,387 |
|
|
$ |
40,152 |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share from continuing operations: as reported |
|
$ |
1.01 |
|
|
$ |
0.93 |
|
Diluted earnings per share from continuing operations: pro forma |
|
$ |
0.93 |
|
|
$ |
0.81 |
|
|
|
|
| 1 |
|
Net income for fiscal 2005 as reported includes a $4.4 million pre-tax charge associated with
accelerated vesting of stock options. |
Effective April 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123(R),
“Share-Based Payment”. In addition to recognizing compensation expense related to restricted stock
and performance units, SFAS 123(R) also requires the Company to recognize compensation expense
related to the estimated fair value of stock options and other equity-based compensation
instruments. The Company adopted SFAS 123(R) using the modified-prospective-transition method.
Under that transition method, compensation expense recognized subsequent to adoption includes (a)
compensation cost for all share-based payments granted prior to, but
not yet vested as of April 1, 2006, based on the values estimated in accordance with the original provisions of SFAS
123, and (b) compensation cost for all share-based payments granted subsequent to April 1, 2006,
based on the grant-date fair values estimated in accordance with the provisions of SFAS 123(R).
Consistent with the modified-prospective-transition method, the Company’s results of operations for
prior periods have not been adjusted to reflect the adoption of SFAS 123(R). As a result of
recognizing compensation expense for stock options pursuant to the provisions of SFAS 123(R), the
Company’s income before income taxes and net income for the fiscal year ended March 31, 2007 were
$4.4 million and $3.5 million lower, respectively, than if the Company had continued to account for
stock options under APB No. 25. In addition, basic and diluted earnings per share for the twelve
months ended March 31, 2007 were $0.08 and $0.07 lower, respectively, than if the Company had
continued to account for stock options under APB No. 25.
The following table reflects the components of stock-based compensation expense recognized in the
Company’s Consolidated Statements of Income for the twelve months ended March 31, 2007 and 2006,
respectively:
| |
|
|
|
|
|
|
|
|
| |
|
Twelve Months Ended |
|
| |
|
March 31, |
|
| (in thousands) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
Stock options |
|
$ |
4,425 |
|
|
$ |
— |
|
Restricted stock |
|
|
4,879 |
|
|
|
1,471 |
|
Performance units |
|
|
1,646 |
|
|
|
— |
|
|
|
|
|
|
|
|
Total stock-based compensation expense, pre-tax |
|
|
10,950 |
|
|
|
1,471 |
|
Tax benefit from stock-based compensation expense |
|
|
3,349 |
|
|
|
544 |
|
|
|
|
|
|
|
|
Total stock-based compensation expense, net of tax |
|
$ |
7,601 |
|
|
$ |
927 |
|
|
|
|
|
|
|
|
69
The employee stock-based compensation cost reflected above that would be properly capitalized as
part of inventory and included in research and development expense for the fiscal year ended March
31, 2007 was minor. The above table does not reflect compensation expense related to stock option
grants in the prior fiscal periods since the Company did not record stock option expense pursuant
to APB No. 25, as previously discussed.
The Company has granted options to key employees and non-employee directors under its 2005 Plan and
1991 Plan. Options granted under both plans are exercisable in four equal annual installments
beginning one year from the date of grant, and expire ten years from the date of grant. Options
are granted at the fair market value on the date of grant. Activity in the stock option plans
during fiscal 2007, 2006 and 2005 was as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Options Outstanding |
|
| |
|
Number |
|
|
Weighted Average |
|
| |
|
of Shares |
|
|
Price per Share |
|
Balance March 31, 2004 |
|
|
6,518,153 |
|
|
$ |
14.08 |
|
| |
Granted |
|
|
818,650 |
|
|
|
32.43 |
|
Exercised |
|
|
(1,028,136 |
) |
|
|
11.22 |
|
Canceled or terminated |
|
|
(143,936 |
) |
|
|
19.77 |
|
|
|
|
|
|
|
|
Balance March 31, 2005 |
|
|
6,164,731 |
|
|
$ |
16.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
893,050 |
|
|
|
37.49 |
|
Exercised |
|
|
(3,161,517 |
) |
|
|
13.79 |
|
Canceled or terminated |
|
|
(214,186 |
) |
|
|
22.41 |
|
|
|
|
|
|
|
|
Balance March 31, 2006 |
|
|
3,682,078 |
|
|
$ |
24.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
280,000 |
|
|
|
46.39 |
|
Exercised |
|
|
(1,276,990 |
) |
|
|
18.89 |
|
Canceled or terminated |
|
|
(423,540 |
) |
|
|
32.68 |
|
|
|
|
|
|
|
|
Balance March 31, 2007 |
|
|
2,261,548 |
|
|
$ |
28.13 |
|
|
|
|
|
|
|
|
At March 31, 2007, the 2005
Plan had options for 1,911,668 shares granted and outstanding, and 2.9 million shares
available for grant. The 1991 Plan had options for 349,880 shares granted and outstanding
at March 31, 2007. No additional options can be granted under the 1991 or 2000 Plans.
Information regarding stock options outstanding at March 31, 2007 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding |
|
|
Options Exercisable |
|
| |
|
|
|
|
|
Weighted-Average |
|
|
Weighted- |
|
|
|
|
| |
|
Number of |
|
|
Remaining |
|
|
Average |
|
|
Number of |
|
|
Weighted-Average |
|
| Price Range |
|
Shares |
|
|
Contractual Life |
|
|
Exercise Price |
|
|
Shares |
|
|
Exercise Price |
|
Under $21.07 |
|
|
939,304 |
|
|
|
4.28 |
|
|
$ |
15.57 |
|
|
|
828,786 |
|
|
$ |
14.85 |
|
$21.07-$36.88 |
|
|
775,494 |
|
|
|
7.35 |
|
|
$ |
33.27 |
|
|
|
288,110 |
|
|
$ |
31.73 |
|
$36.89-$52.68 |
|
|
546,750 |
|
|
|
8.85 |
|
|
$ |
42.41 |
|
|
|
61,250 |
|
|
$ |
38.28 |
|
At March 31, 2007, 2006 and 2005, stock options to purchase 1.2 million, 1.7 million and 3.9
million shares, respectively, were exercisable at weighted-average exercise prices of $20.19,
$15.96 and $13.17 per share, respectively.
70
The weighted-average fair values of stock options granted were $15.63, $10.60 and $8.91 per share
for the fiscal years ended March 31, 2007, 2006 and 2005, respectively. These values were
estimated at the date of grant using the Black-Scholes option valuation model and the following
assumptions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Risk-free interest rate |
|
|
4.91 |
% |
|
|
3.93 |
% |
|
|
3.96 |
% |
Expected life (in years) |
|
|
4.77 |
|
|
|
4.93 |
|
|
|
4.74 |
|
Expected volatility |
|
|
0.36 |
|
|
|
0.32 |
|
|
|
0.32 |
|
Expected dividend yield |
|
|
1.503 |
% |
|
|
2.047 |
% |
|
|
2.115 |
% |
The fair values of shares of restricted stock and performance units are determined based on the
closing price of the Company’s common stock on the grant dates. Information regarding our
restricted stock during the year ended March 31, 2007 is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted-average |
|
| Nonvested shares (in thousands, except per share amounts) |
|
Shares |
|
|
grant date fair value |
|
|
|
|
|
|
|
|
Nonvested at March 31, 2006 |
|
|
279 |
|
|
$ |
52.71 |
|
Granted |
|
|
210 |
|
|
|
44.38 |
|
Lapsed |
|
|
(52 |
) |
|
|
52.71 |
|
Forfeited |
|
|
(91 |
) |
|
|
52.48 |
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2007 |
|
|
346 |
|
|
$ |
47.71 |
|
|
|
|
|
|
|
|
|
As of March 31, 2007, there was $20.6 million of total unrecognized compensation cost related to
non-vested awards of stock options, shares of restricted stock and performance stock units. That
cost is expected to be recognized over a weighted-average period of 1.7 years. We recognize the
total compensation cost on a straight-line basis over the service period of each vesting tranche.
Performance Award Program
In June and July 2006, certain management-level employees received grants of Performance Stock
Units (“PSUs”). A PSU gives the recipient the right to receive common stock that is contingent
upon achievement of specified pre-established performance goals over a performance period ending
March 31, 2009. The performance goals are based upon Mentor’s total shareholder return compared to
the average total shareholder return reported by the Russell 2500 Growth Index over the performance
period.
PSUs are assigned a unit value based on the fair market value of the Company’s common stock on
the grant date. The ultimate level of attainment of performance goals is determined at the end of
the performance period and expressed as a percentage (within a range of 0% to 200%). This
percentage is multiplied by the number of PSUs initially granted to determine the number of shares
of common stock payable to the recipient. In addition, dividends that would have accrued over the
performance period attributable to the final share grant under the program will be payable to the
recipients.
Vesting of the PSUs occurs entirely on March 31, 2009. Consequently, no PSUs have yet vested, no
common stock has been issued and no dividends have been accrued or paid to any recipient as of
March 31, 2007. The fair value of the PSUs at the date of grant is being amortized as compensation
expense over the performance period.
Information regarding our Performance Stock Units during the fiscal year ended March 31, 2007 is as
follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Fair market |
|
| |
|
|
|
|
|
value at date |
|
| Nonvested performance stock units (in thousands) |
|
Shares |
|
|
of grant |
|
|
|
|
|
|
|
|
Nonvested at March 31, 2006 |
|
|
— |
|
|
$ |
— |
|
Granted (maximum award) |
|
|
357 |
|
|
|
7,580 |
|
Forfeited |
|
|
(50 |
) |
|
|
(1,060 |
) |
|
|
|
|
|
|
|
Nonvested at March 31, 2007 |
|
|
307 |
|
|
$ |
6,520 |
|
|
|
|
|
|
|
|
71
Note H — Income Taxes
Income tax expense consists of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, |
|
| (in thousands) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
22,281 |
|
|
$ |
17,436 |
|
|
$ |
18,513 |
|
Foreign |
|
|
2,177 |
|
|
|
1,660 |
|
|
|
615 |
|
State |
|
|
3,379 |
|
|
|
519 |
|
|
|
3,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,837 |
|
|
|
19,615 |
|
|
|
22,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(2,617 |
) |
|
|
637 |
|
|
|
(2,327 |
) |
Foreign |
|
|
(426 |
) |
|
|
(985 |
) |
|
|
223 |
|
State |
|
|
(246 |
) |
|
|
339 |
|
|
|
(533 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,289 |
) |
|
|
(9 |
) |
|
|
(2,637 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,548 |
|
|
$ |
19,606 |
|
|
$ |
19,937 |
|
|
|
|
|
|
|
|
|
|
|
The reconciliation of the federal statutory rate to the Company’s effective rate is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Federal statutory rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Increase (decrease) resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
State taxes net of federal tax benefit |
|
|
1.4 |
|
|
|
1.6 |
|
|
|
2.2 |
|
Non-taxable interest and dividends |
|
|
(1.4 |
) |
|
|
(0.4 |
) |
|
|
(0.1 |
) |
Research and development credit |
|
|
(1.9 |
) |
|
|
(1.7 |
) |
|
|
(0.5 |
) |
ETI/MFG deduction |
|
|
(0.4 |
) |
|
|
(1.1 |
) |
|
|
(0.9 |
) |
Foreign operations |
|
|
(4.9 |
) |
|
|
(7.3 |
) |
|
|
(4.2 |
) |
Dividend repatriation |
|
|
— |
|
|
|
2.5 |
|
|
|
— |
|
Equity compensation |
|
|
0.8 |
|
|
|
— |
|
|
|
— |
|
Other |
|
|
1.3 |
|
|
|
0.4 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29.9 |
% |
|
|
29.0 |
% |
|
|
31.8 |
% |
|
|
|
|
|
|
|
|
|
|
Significant components of the Company’s deferred tax liabilities and assets at March 31 are as
follows:
| |
|
|
|
|
|
|
|
|
| (in thousands) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Unrealized loss on long-term marketable securities |
|
|
— |
|
|
|
(27 |
) |
|
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Book liabilities not deductible for tax |
|
|
25,192 |
|
|
|
20,024 |
|
Inventory |
|
|
471 |
|
|
|
521 |
|
Profit in inventory of foreign subsidiaries |
|
|
3,733 |
|
|
|
3,295 |
|
Book over tax depreciation |
|
|
1,654 |
|
|
|
— |
|
Convertible notes hedge |
|
|
3,918 |
|
|
|
6,239 |
|
|
|
|
|
|
|
|
|
|
|
34,968 |
|
|
|
30,079 |
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
34,968 |
|
|
$ |
30,052 |
|
|
|
|
|
|
|
|
The Company does not provide for U.S. income taxes on undistributed earnings of the Company’s
foreign operations that are intended to be invested indefinitely outside the United States. At
March 31, 2007, these foreign earnings amounted to approximately $46.6 million. If repatriated,
additional taxes of approximately $17.2 million on these earnings would be due, based on the
current tax rates in effect. For the years ended March 31, 2007, 2006, and 2005 foreign income
before taxes were $20.4 million, $19.3 million and $13.8 million, respectively.
72
Note I — Intangible Assets and Goodwill
SFAS No. 142 specifies the financial accounting and reporting for acquired goodwill and other
intangible assets. Goodwill and intangible assets that have indefinite useful lives are tested for
impairment annually or more frequently if impairment indicators arise. None of the Company’s
intangible assets have an indefinite life. Intangible assets with
finite lives are
amortized on a straight-line basis over their useful lives. Goodwill and intangible assets have
been recorded at either incurred or allocated cost. Allocated costs were based on respective fair
values at the date of acquisition.
The impairment tests involve the use of both estimates of fair value as well as cash flow
assumptions. Impairment tests are performed in the fourth quarter of each
fiscal year. No impairment was noted for fiscal 2006. For fiscal 2007, the Company
performed impairment testing and determined that certain intangible assets had fair values less
than their respective book values and were deemed impaired. Accordingly, the Company recorded a
net impairment charge, related to the closure of our Scotland
facility, for the impairment of long-lived assets of $2.6 million, including $1.2
million related to intangibles and $1.4 million related to
property and equipment and other assets.
During fiscal 2007, the Company entered into a commercialization
agreement with Genzyme Corporation. Two milestone obligations of $3 million each were met as of March 31, 2007 and are included in
other intangibles. These milestones will be amortized over three
years for one of the $3 million milestones and ten years for the
other.
Balances of acquired intangible assets were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, 2007 |
|
| |
|
|
|
|
|
Accumulated |
|
|
Carrying |
|
|
|
|
| (in thousands) |
|
Original Cost |
|
|
Amortization |
|
|
Value |
|
|
Useful Life |
|
Patents |
|
$ |
1,103 |
|
|
$ |
(494 |
) |
|
$ |
609 |
|
|
|
5-20 |
|
Licenses |
|
|
11,323 |
|
|
|
(3,849 |
) |
|
|
7,474 |
|
|
|
3-17 |
|
Trademarks |
|
|
106 |
|
|
|
(33 |
) |
|
|
73 |
|
|
|
3-20 |
|
Other intangibles |
|
|
11,515 |
|
|
|
(3,708 |
) |
|
|
7,807 |
|
|
|
3-20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal intangibles |
|
|
24,047 |
|
|
|
(8,084 |
) |
|
|
15,963 |
|
|
|
|
|
Goodwill |
|
|
13,367 |
|
|
|
(723 |
) |
|
|
12,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles and goodwill |
|
$ |
37,414 |
|
|
$ |
(8,807 |
) |
|
$ |
28,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, 2006 |
|
| |
|
|
|
|
|
Accumulated |
|
|
Carrying |
|
|
|
|
| (in thousands) |
|
Original Cost |
|
|
Amortization |
|
|
Value |
|
|
Useful Life |
|
Patents |
|
$ |
3,207 |
|
|
$ |
(1,152 |
) |
|
$ |
2,055 |
|
|
|
5-20 |
|
Licenses |
|
|
10,823 |
|
|
|
(3,156 |
) |
|
|
7,667 |
|
|
|
3-17 |
|
Trademarks |
|
|
67 |
|
|
|
(23 |
) |
|
|
44 |
|
|
|
10-20 |
|
Other intangibles |
|
|
5,672 |
|
|
|
(2,328 |
) |
|
|
3,344 |
|
|
|
3-20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal intangibles |
|
|
19,769 |
|
|
|
(6,659 |
) |
|
|
13,110 |
|
|
|
|
|
Goodwill |
|
|
12,601 |
|
|
|
(723 |
) |
|
|
11,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles and goodwill |
|
$ |
32,370 |
|
|
$ |
(7,382 |
) |
|
$ |
24,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate amortization expense on intangible assets recorded for fiscal 2007 was $2.5 million.
The following table summarizes the estimated aggregate amortization expense for each of the five
succeeding fiscal years:
| |
|
|
|
|
| Year Ended |
|
Estimated Amortization
Expense (in thousands) |
|
March 31, 2008 |
|
$ |
3,354 |
|
March 31, 2009 |
|
$ |
2,825 |
|
March 31, 2010 |
|
$ |
1,919 |
|
March 31, 2011 |
|
$ |
877 |
|
March 31, 2012 |
|
$ |
877 |
|
73
The changes in the carrying amount of goodwill for fiscal 2007 and 2006 were as follows:
| |
|
|
|
|
| (in thousands) |
|
|
|
|
Balance at March 31, 2005 |
|
$ |
11,860 |
|
Goodwill acquired |
|
|
455 |
|
Goodwill disposed |
|
|
(73 |
) |
Currency translation |
|
|
(364 |
) |
|
|
|
|
Balance at March 31, 2006 |
|
$ |
11,878 |
|
|
|
|
|
Currency translation |
|
|
766 |
|
|
|
|
|
Balance at March 31, 2007 |
|
$ |
12,644 |
|
|
|
|
|
Note J — 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:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, |
|
| (in thousands) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations: as reported |
|
$ |
57,624 |
|
|
$ |
48,079 |
|
|
$ |
42,808 |
|
Add back after tax interest expense on convertible note |
|
|
3,208 |
|
|
|
3,208 |
|
|
|
3,208 |
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations for numerator of diluted
earnings per share |
|
$ |
60,832 |
|
|
$ |
51,287 |
|
|
$ |
46,016 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, |
|
| (in thousands) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations |
|
$ |
232,990 |
|
|
$ |
14,278 |
|
|
$ |
12,073 |
|
|
|
|
|
|
|
|
|
|
|
| |
Net income: as reported |
|
$ |
290,614 |
|
|
$ |
62,357 |
|
|
$ |
54,881 |
|
Add back after tax interest expense on convertible notes |
|
|
3,208 |
|
|
|
3,208 |
|
|
|
3,208 |
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations for numerator of diluted
earnings per share |
|
$ |
293,822 |
|
|
$ |
65,565 |
|
|
$ |
58,089 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, |
|
| (in thousands, except per share data) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average outstanding shares: basic |
|
|
41,960 |
|
|
|
42,995 |
|
|
|
41,921 |
|
Restricted grants |
|
|
152 |
|
|
|
140 |
|
|
|
— |
|
Shares issuable through exercise of stock options |
|
|
1,000 |
|
|
|
1,901 |
|
|
|
2,620 |
|
Shares issuable through convertible notes |
|
|
5,151 |
|
|
|
5,138 |
|
|
|
5,126 |
|
Shares issuable through warrants |
|
|
829 |
|
|
|
696 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Weighted average outstanding shares: diluted |
|
|
49,092 |
|
|
|
50,870 |
|
|
|
49,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
1.37 |
|
|
$ |
1.12 |
|
|
$ |
1.02 |
|
Discontinued operations |
|
$ |
5.55 |
|
|
$ |
0.33 |
|
|
$ |
0.29 |
|
Basic earnings per share |
|
$ |
6.93 |
|
|
$ |
1.45 |
|
|
$ |
1.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
1.24 |
|
|
$ |
1.01 |
|
|
$ |
0.93 |
|
Discontinued operations |
|
$ |
4.75 |
|
|
$ |
0.28 |
|
|
$ |
0.24 |
|
Diluted earnings per share |
|
$ |
5.99 |
|
|
$ |
1.29 |
|
|
$ |
1.17 |
|
74
Employee stock options
Shares issuable under the Company’s Long Term Incentive Plan, including employee stock options,
restricted shares and performance stock units, may be included in the diluted earnings per share
calculation using the treasury stock method. The Company would exclude the potential stock
issuances in the diluted earnings per share calculation when the combined exercise price, average
unamortized fair values and assumed tax benefits upon exercise are greater than the average market
price for the Company’s underlying common stock as the inclusion of these shares in the diluted
shares outstanding would be anti-dilutive. The total number of shares excluded based on this
policy was 183,500, 1,000 and 68,500 shares for fiscal 2007, 2006 and 2005 respectively. This
calculation is performed on an instrument-by-instrument basis.
Convertible subordinated notes and warrants
The terms of the Company’s convertible subordinated notes include restrictions which prevent the
holder from converting the notes until the Company’s share price
exceeds 120% of the conversion price
on 20 trading days of the 30 consecutive trading day period ending on the first day of such fiscal
quarter. However, EITF issue No. 04-8 requires that the Company use the if-converted method to
determine the dilutive impact of the convertible subordinated notes described below in Note K.
Under the if-converted method, the numerator of the diluted earnings per share calculation is
increased by the after-tax interest expense avoided for the period upon conversion and the
denominator of the calculation is increased by approximately 5.2 million shares potentially issued
upon conversion for both that current reporting period and the corresponding year-to-date reporting
period.
As described below in Note K, the Company purchased a convertible note hedge and sold warrants
which, in combination, have the effect of reducing the dilutive impact of the convertible
subordinated notes by increasing the effective conversion price for the notes from the Company’s
perspective to approximately $39.1453. SFAS 128, however, requires the Company to analyze the
impact of the convertible note hedge and warrants on diluted earnings per share separately. As a
result, the purchase of the convertible note hedge is excluded because its impact will always be
anti-dilutive. SFAS 128 further requires that the impact of the sale of the warrants be computed
using the treasury stock method.
For example, using the treasury stock method, if the average price of the Company’s stock during
the period ended March 31, 2007 had been $38.00, $50.00 or $60.00, the shares from the warrants to
be included in diluted earnings per share would have been zero, 1,100,000 and 1,800,000 shares,
respectively. The total maximum number of shares that could potentially be included under the
warrants is approximately 5.2 million. The average share price of our stock during the quarter
ended March 31, 2007 exceeded the $39.1453 conversion price of the warrants. The impact of these
warrants was that 829,000 shares were added to the diluted shares and diluted earnings per share
calculation as of the fiscal year ended March 31, 2007.
Note K — Long-Term Debt
On December 22, 2003, the Company completed an offering of $150 million of convertible subordinated
notes due January 1, 2024 pursuant to Rule 144A under the Securities Act of 1933. The notes bear
interest at 23/4% per annum and are convertible into shares of the Company’s common stock at an
adjusted conversion price of $29.0794 per share and are subordinated to all existing and future
senior debt.
Holders of the notes may convert their notes only if any of the following conditions is satisfied:
| |
§ |
|
during any fiscal quarter prior to January 1, 2019, if the closing price of the
Company’s common stock for at least 20 trading days in the 30 consecutive trading day
period ending on the first trading day of such fiscal quarter is more than 120% of the
conversion price per share of the Company’s common stock on such trading day; |
| |
| |
§ |
|
any business day on or after January 1, 2019, if the closing price of the Company’s
common stock on the immediately preceding trading day is more than 120% of the conversion
price per share of the Company’s common stock on such trading day; |
75
| |
§ |
|
during the five business day period after any five consecutive trading day period if the
average of the trading prices of the notes for such five consecutive trading day period is
less than 98% of the average of the conversion values of the notes during such period,
subject to certain limitations; |
| |
| |
§ |
|
if the Company has called the notes for redemption; or |
| |
| |
§ |
|
if the Company makes certain significant distributions to holders of its common stock or
the Company enters into specified corporate transactions. |
At an initial conversion price of $29.289, each $1,000 principle amount of notes will be
convertible into 34.1425 shares of common stock. As a result of the Company’s recent dividend
increase, the conversion price has been adjusted to $29.0794, and each $1,000 principle amount will
be convertible into 34.3886 shares of common stock.
During the quarter ending March 31, 2007, one of the conditions required for conversion of the
notes was satisfied and, accordingly, the holders of notes have the option to convert the notes
into common shares at the aforementioned adjusted conversion price per share.
Concurrent with the issuance of the convertible subordinated notes, the Company purchased a
convertible note hedge from Credit Suisse First Boston LLC. The note hedge expires on January 1,
2009 and gives the Company the ability to purchase shares of its common stock equal to the number
of shares the Company is obligated to issue under any convertible notes converted by the holder
prior to the hedge expiration date at a purchase price equal to the conversion price of the
convertible notes.
Concurrent with the issuance of the notes, the Company issued warrants to Credit Suisse First
Boston LLC. The warrants are European-style call warrants, which also expire on January 1, 2009.
The holder of the warrants is entitled to purchase 5.2 million shares of the Company’s common stock
at $39.1453. The number of shares and exercise price of the warrants are subject to adjustment
from time to time in a similar manner to the convertible notes.
Both the note hedge and the warrants may be settled either in cash or shares at the Company’s
option. The Company is not obligated under either the warrants or the note hedge, to settle its
obligations in cash. Under no circumstance is the Company obligated to issue shares under the note
hedge. The warrants do require the Company to settle its obligations thereunder in cash or shares,
do permit the Company to settle its obligation in unregistered shares and contain no provision
obligating the Company to settle its obligations in freely-tradable shares, and the Company is not
required to make any cash payments under the warrants for failure to have a registration statement
declared effective. There are no required cash payments to the holder of the warrants if the
shares initially delivered upon settlement are subsequently sold by the holder and the sales
proceeds are insufficient to provide the holder with an expected return. The Company has
sufficient authorized shares to settle the warrants and the convertible notes in shares,
considering all of its obligations under the instruments for their full terms. The warrants, note
hedge, and convertible notes each contain an express limit on the number of shares issuable
thereunder. The warrants and note hedge expressly indicate that the holder of the warrants has no
rank higher than those of a shareholder of the stock underlying the warrants. Under certain
circumstances in a change of control of the Company it may be required to issue additional shares
under a make-whole provision under the warrant. The Company has no obligation to post collateral
under the warrants, convertible notes or note hedge.
The cost of the note hedge and the proceeds from the sale of warrants have been included in
shareholders’ equity in accordance with the guidance in EITF No. 00-19, “Accounting for Derivative
Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock.” Any proceeds
received or payments made upon termination of these instruments will be recorded in shareholders’
equity.
76
Note L — Share Repurchase Program
The Company has a stock repurchase program to reduce the overall number of shares outstanding,
which has helped offset the dilutive effects of its employee stock option programs and the dilutive
effect of EITF Issue No. 04-8 related to the inclusion of contingently convertible debt in fully
diluted earnings per share calculations. During
the quarter ended June 30, 2006, the Company repurchased 2.0 million shares of its common stock for
a total of $84 million from an investment partnership managed by ValueAct Capital. ValueAct
Capital’s managing director, Mr. Jeff Ubben, was a member of the Company’s Board of Directors at
the time of this share repurchase. Mr. Ubben is no longer on the Company’s Board of Directors.
The repurchase of these shares was pre-approved by the Audit Committee and the Board of Directors
with interested parties abstaining or not in attendance. See Note N – “Related Party Transactions”
for additional information on the share repurchase.
On June 16, 2006, the Company entered into a stock purchase plan with Citigroup Global Markets Inc.
for the purpose of repurchasing up to 5 million shares of its common stock, up to a cumulative
purchase price of $166 million, under a Rule 10b5-1 Plan (the “10b5 Plan”) compliant with Rule
10b-18. In connection with the entry into the 10b5 Plan, the Company’s Board of Directors
increased the authorized number of shares available for repurchase pursuant to our stock repurchase
program from 3.3 million to 5.0 million shares. The timing of purchases and the exact number of
shares to be purchased depend on market conditions. As of March 31, 2007, the Company has
repurchased 175,100 shares of its common stock under the 10b5 Plan for a total purchase price of
$8.2 million. The repurchase program and the 10b5 Plan may be suspended or discontinued at any
time.
In addition to the shares the Company repurchased under the Rule 10b5 Plan mentioned above, it
reacquired an additional 15,465 shares for the payment of withholding taxes related to the lapsing
of restrictions on certain outstanding restricted stock grants.
As of March 31, 2007, approximately 4.8 million shares remained authorized for repurchase under the
Company’s stock repurchase program. All shares repurchased under the program have been retired and
are no longer deemed to be outstanding. The timing of repurchases is subject to market conditions
and cash availability. As of May 23, 2007, during fiscal 2008 an additional 2.7 million shares have
been repurchased at an average purchase price of $40.34 per share. There is no guarantee that the
remaining shares authorized for repurchase by the Board will ultimately be repurchased.
The additional shares available for repurchase are subject to limitations set forth in the
Company’s Credit Agreement previously entered into on May 26, 2005, amended on May 31, 2006 and
further amended on March 30, 2007. The amended Credit Agreement now permits the repurchase of up
to $400 million of equity securities after March 30, 2007. See Note F – “Short Term Bank
Borrowings” for additional information on the Credit Agreement.
Note M — Commitments
The Company leases certain facilities under non-cancelable operating leases with unexpired terms
ranging from one to 10 years. Most leases contain renewal options. Rental expense included in
continuing operations for these leases was $4.0 million, $3.9 million and $3.3 million for fiscal
2007, 2006 and 2005, respectively. Future minimum lease payments under lease arrangements at March
31, 2007 were as follows:
| |
|
|
|
|
| (in thousands) |
|
|
|
|
2008 |
|
$ |
4,451 |
|
2009 |
|
|
4,585 |
|
2010 |
|
|
4,564 |
|
2011 |
|
|
4,313 |
|
2012 |
|
|
3,707 |
|
Thereafter |
|
|
5,909 |
|
|
|
|
|
Total |
|
$ |
27,529 |
|
|
|
|
|
During fiscal 2007, we entered into a distributor agreement with Niadyne, Inc. to distribute the
NIA 24 line of science-based cosmeceutical products. Under the terms of this agreement, the
Company is committed to product purchases of $4.0 million and $6.5 million in fiscal 2008 and 2009,
respectively.
77
Note N — Related Party Transactions
On December 13, 2004, the Company repurchased 1,500,000 shares of its common stock from two
investment partnerships managed by VA Partners, LLC, at the time the Company’s largest shareholder,
at a purchase price of $33.85 per share, the closing price of the common stock on the NYSE on that
date. On December 14, 2004 the Company repurchased an additional 750,000 shares of its common
stock from the same investment partnerships at $34.00 per share, a discount to the $34.41 closing
price on the NYSE on that date. The 2.25 million shares were repurchased for a total of $76.3
million pursuant to the Company’s continuing stock repurchase program and represented approximately
5% of outstanding shares before the occurrence of the transactions. VA Partners, LLC, through
several of its investment partnerships, owned 6.9 million shares representing approximately 16% of
our outstanding common stock prior to these transactions. Mr. Jeff Ubben, a managing member of VA
Partners, LLC, was a member of Mentor’s Board of Directors at the time of this share repurchase.
Mr. Ubben is no longer on the Company’s Board of Directors. The Company’s Audit Committee evaluated
and pre-approved the transactions.
On March 6, 2006, the Company repurchased 995,814 shares of its common stock from two retiring
members of the Board of Directors at a purchase price of $43.00 per share, a discount from the
closing price of the Company’s common stock on the NYSE of $44.37 on that date. The Company’s
Audit Committee and the Board of Directors evaluated and pre-approved the transactions.
On June 5, 2006, the Company repurchased 2 million shares of its common stock from an investment
partnership managed by ValueAct Capital at $42.00 per share, a discount to the $42.21 closing
market price on the NYSE on that date. ValueAct Capital’s managing director, Mr. Jeff Ubben, was a
member of the Company’s Board of Directors at the time of this share repurchase. Mr. Ubben is no
longer on the Company’s Board of Directors. The 2.0 million shares were repurchased for a total of
$84 million pursuant to the Company’s continuing stock repurchase program and represent
approximately 4.6% of outstanding shares before the transactions. After the transactions, ValueAct
Capital, through several of its investment partnerships, continued to own more than 2 million
shares of Common Stock, or approximately 5% of the outstanding shares of the Company. The
repurchase of these shares was pre-approved by the Audit Committee and the Board of Directors with
interested parties abstaining or not in attendance.
See Note Q for a description of severance payments made to two of the Company’s former executive
officers.
Note O – Warranty Reserves
The Company offer two types of warranties relating to its breast implants in the United States
and Canada: a standard limited warranty which is offered at no additional charge and
an enhanced limited warranty, generally at an additional charge of $100 in the U.S. ($100 CAD in Canada), both
of which provide limited financial assistance in the event of a deflation or rupture. The
Company’s standard limited warranty is also offered in certain European and other international
countries for silicone gel-filled breast implants. During the fourth quarter of fiscal 2007, we
began a limited-time offer of free enrollment in our Enhanced Advantage Limited Warranty for
MemoryGel™ implants implanted after February 15, 2007, in the U.S. The Company provides
an accrual for the estimated cost of the standard and/or free limited breast implant warranties at
the time revenue is recognized. The cost of the enhanced limited warranty, when sold at an
additional charge to the customer, is recognized as costs are incurred. Costs related to
warranties are recorded in cost of sales. The accrual for the
standard and/or free limited warranty is based on estimates, which are based on relevant factors such as unit sales,
historical experience, the limited warranty period, estimated costs, and, to a limited extent,
information developed using actuarial techniques. The accrual is analyzed periodically for
adequacy. In the first quarter of fiscal 2006, the Company expanded its standard limited warranty
programs to provide certain financial assistance for surgical procedures within ten years of
implantation (increased from five years) and in the third quarter of fiscal 2006 expanded the
program coverage to include silicone gel-filled breast implant sales implanted in certain European
and other international countries. These changes to the Company’s warranty programs were not
retroactive, but applicable to implants implanted subsequent to the effective date of the expanded
programs.
78
The following table presents changes in the Company’s short-term and long-term accrued product
warranty reserves for fiscal 2007 and 2006.
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, |
|
| (in thousands) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
Beginning warranty reserves |
|
$ |
13,603 |
|
|
$ |
12,025 |
|
Cost of warranty claims |
|
|
(3,225 |
) |
|
|
(2,704 |
) |
Accrual for product warranties |
|
|
3,930 |
|
|
|
4,282 |
|
|
|
|
|
|
|
|
Ending warranty reserves |
|
$ |
14,308 |
|
|
$ |
13,603 |
|
|
|
|
|
|
|
|
Note P – Contingencies
Warranty and product liability claims are a regular and ongoing aspect of the medical device
industry. At any one time, the Company may be subject to claims against it and may be 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 is currently involved in a number of product liability legal
actions, the outcomes of which are not within its control and may not be known for prolonged
periods of time. The Company has retained liabilities associated with warranty and product
liability claims arising out of its urology products sold prior to the June 2, 2006 closing date.
No individual product liability case or group of cases, in which the Company is currently involved,
is considered material and there are no certified class actions currently pending against the
Company. In accordance with SFAS No. 5 “Accounting for Contingencies,” a liability is recorded in
the consolidated financial statements when a loss is known or considered probable and the amount
can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range,
and no amount within the range is a better estimate, the minimum amount of the range is accrued.
If a loss is not probable or cannot be reasonably estimated, no liability is recorded in the
consolidated financial statements.
The Company carries product liability insurance on all its products, except its silicone gel-filled
implants for which the Company is self-insured. This insurance is subject to certain self-insured
retention and other limits of the policy, exclusions and deductibles that the Company believes to
be appropriate. At March 31, 2007, the Company had established reserves of $2.7 million for
product related claims to the extent that those claims may result in settlements or judgments
within its self-insured retention limits. In addition, at March 31, 2007, the Company had
established additional reserves of $3.8 million, through its
wholly-owned captive insurance
subsidiary based on actuarially determined estimates and taking the Company’s excess insurance
coverage into account. Those reserves were actuarially determined based on historical information,
trends and certain assumptions about future claims and are primarily for claims that have been
asserted. Should actual product liability experience differ from the estimates and assumptions
used to develop these reserves, subsequent changes in these reserves will be recorded in selling,
general and administrative expenses and may affect the Company’s operating results in future
periods.
In addition, the Company also offers limited warranty coverage on some of its products (see Note O
for details). While the Company engages in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of its component suppliers, the limited
warranty obligation is affected by reported rates of product problems as well as the costs incurred
in correcting product problems. Should actual warranty experience differ from the estimates and
assumptions used to develop the warranty reserves, subsequent changes in the reserves will be
recorded in cost of sales and may affect our operating results in future periods.
On March 4, 2004, John H. Alico, et. al., d/b/a PTF Royalty Partnership (“PTF”) filed a lawsuit
against us in the Business Litigation Session of the Superior Court of Massachusetts, Suffolk
County in which PTF alleged, among other things, breach of a merger agreement that involved our
acquisition of Mentor O&O, Inc. (“O&O”), an unrelated entity at that time, which was dated as of
March 14, 1990 (“Merger Agreement”) (prior to the merger, O&O had no affiliation with us). PTF
alleged that we breached the terms of the Merger Agreement by failing to exert commercially
reasonable and diligent efforts to obtain approval by the FDA for a product used for the treatment
of urinary incontinence and by failing to accurately account for and pay royalties due thereunder.
PTF sought damages in excess of $18 million, which was the maximum amount of royalties PTF could
have received under the Merger Agreement. On January 26, 2007, the parties entered into a
confidential settlement agreement and mutual release and the action was formally dismissed on
January 29, 2007.
In addition, in the ordinary course of its business, the Company experiences various types of
claims that sometimes result in litigation or other legal proceedings. The Company does not
anticipate that any of these proceedings will have a material adverse effect on the Company.
79
Note Q – Long-Lived Asset Impairment Charges and Severance and Restructuring Charges
Long-Lived Asset Impairment and Restructuring Charges
During the fourth quarter of fiscal 2007, the Company incurred $2.6 million in expenses related to
certain long-lived assets that were determined to be impaired
associated with the closure of our Scotland facility.
During the fourth quarter of fiscal year 2005, the Company incurred $1.7 million in
expenses related to restructuring of certain of its operations to achieve improved efficiencies and
certain long-lived assets that were determined to be impaired. The restructuring charges totaled
$1.4 million, all of which has been paid, and the impairment charges totaled $0.3 million.
Severance Charges
On February 16, 2005, Christopher J. Conway and Adel Michael each resigned as a director and
executive officer of the Company. In connection with resignation and severance agreements entered
into with them, the Company incurred $8.5 million in expenses in February 2005. As one of the
co-founders of the Company, and following 36 years of service, Mr. Conway received certain
severance compensation in the form of both cash payments totaling $2.3 million and non-cash
benefits in the amount of $2.1 million related to the accelerated vesting of his unvested and
unexpired stock options. In addition, Mr. Adel Michael, the Company’s former Vice Chairman,
received severance compensation in the form of cash benefits in the amount of $1.8 million and
non-cash benefits in the amount of $2.3 million related to the accelerated vesting of his unvested
and unexpired employee stock options.
Note R – Postretirement Benefit Plans
The Company’s Savings and Investment Plan is a qualified salary-reduction plan under Section 401(k)
of the Internal Revenue Code in which substantially all of our U.S. employees may participate by
contributing a portion of their compensation. The Company matches contributions up to specified
percentages of each employee’s compensation. Charges against income for the matching contributions
were $1.1 million, $0.9 million and $0.8 million for fiscal years 2007, 2006 and 2005,
respectively.
The Company’s subsidiary in the Netherlands employed approximately 180 people and 160 people, as of
March 31, 2007 and 2006, respectively, to which it offers a defined benefit plan. As of March 31,
2007, the projected benefit obligation, plan assets and accrued pension costs were $2.4 million,
$1.6 million and $0.8 million, respectively. As of March 31, 2006, the projected benefit
obligation, plan assets and accrued pension costs were $2.1 million, $1.4 million and $0.8 million,
respectively.
Note S – Discontinued Operations
In October 2005 the Company announced that it was evaluating strategic alternatives for its
urology business that would both enhance shareholder value and enable the Company to focus more
fully on its aesthetics business. On May 17, 2006 the Company executed a definitive agreement for
the sale of the Company’s surgical urology and clinical and consumer healthcare business segments
to Coloplast for $463 million, of which $456 million was in cash and $7 million in non-cash
consideration consisting of an indemnification by Coloplast to Mentor related to certain foreign
tax credits that the Company expects to realize. In accordance with the agreement, a post-closing
adjustment of $2.7 million was paid by the Company to Coloplast in the fourth quarter of
fiscal 2007. The sale was completed
on June 2, 2006. In accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of
Long Lived Assets,” the assets and liabilities related to this transaction have been segregated
from continuing operations and are reported as assets and liabilities of discontinued operations in
the accompanying consolidated balance sheets. In addition, operations associated with these
segments have been classified as income from discontinued operations in the accompanying
consolidated statements of income and cash flows associated with these segments are included in
cash flows from discontinued operations in the consolidated statements of cash flows. Net cash
used in discontinued operations for fiscal 2007 was
$121.8 million, which includes approximately
$117 million in income tax paid on the sale of the urology business.
80
The major classes of assets and liabilities of discontinued operations included in the Company’s
Consolidated Balance Sheet as of March 31, 2006 was as follows:
| |
|
|
|
|
| |
|
As of March 31, |
|
| (In thousands) |
|
2006 |
|
|
|
|
|
Assets held for sale: |
|
|
|
|
Accounts receivable, net |
|
$ |
50,698 |
|
Inventories |
|
|
38,016 |
|
Deferred income taxes |
|
|
4,305 |
|
Prepaid expenses and other current assets |
|
|
3,051 |
|
|
|
|
|
Total current assets held for sale |
|
|
96,070 |
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
29,497 |
|
Intangible assets, net |
|
|
14,063 |
|
Goodwill, net |
|
|
16,380 |
|
Other assets |
|
|
324 |
|
|
|
|
|
Total assets held for sale |
|
$ |
156,334 |
|
|
|
|
|
|
|
|
|
|
Liabilities associated with assets held for sale: |
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
27,220 |
|
Income taxes payable |
|
|
1,751 |
|
Current portion of purchase price related to acquired technologies
and acquisitions |
|
|
1,000 |
|
|
|
|
|
Total current liabilities associated with assets held for sale |
|
|
29,971 |
|
|
|
|
|
|
Other long-term liabilities |
|
|
10,555 |
|
|
|
|
|
Total liabilities associated with assets held for sale |
|
$ |
40,526 |
|
|
|
|
|
Net sales from discontinued operations were $38.4 million, $235.5 million and $231.7 million for
fiscal years 2007, 2006 and 2005, respectively. Income before income taxes from discontinued
operations were $3.6 million, $24.8 million and $18.5 million for fiscal years 2007, 2006 and 2005,
respectively.
Included in discontinued operations for fiscal 2006, were pre-tax charges of $6.1 million related
to the divestiture of the Company’s surgical urology and clinical and consumer healthcare
businesses. Included in discontinued operations for fiscal 2005 were pre-tax charges of $6.6
million related to the Company’s restructuring and long-lived asset impairment.
Note T – Segment Information for Continuing Operations
The Company operates in one business
segment – aesthetic products. Therefore, results of
operations are reported on a consolidated basis for purposes of segment reporting.
The Company’s
operations by principal product and geographic area are presented below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ending March 31, |
|
| (in thousands) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Principal products net sales |
|
|
|
|
|
|
|
|
|
|
|
|
Breast implants |
|
$ |
262,556 |
|
|
$ |
233,189 |
|
|
$ |
217,420 |
|
Body contouring |
|
|
16,734 |
|
|
|
17,782 |
|
|
|
18,609 |
|
Other aesthetics, including
non-surgical facial products |
|
|
22,684 |
|
|
|
17,301 |
|
|
|
15,697 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
301,974 |
|
|
$ |
268,272 |
|
|
$ |
251,726 |
|
|
|
|
|
|
|
|
|
|
|
81
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ending March 31, |
|
| (in thousands) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Geographic area net sales |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
217,785 |
|
|
$ |
192,764 |
|
|
$ |
186,488 |
|
Canada |
|
|
16,234 |
|
|
|
15,178 |
|
|
|
12,641 |
|
All other countries |
|
|
67,955 |
|
|
|
60,330 |
|
|
|
52,597 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
301,974 |
|
|
$ |
268,272 |
|
|
$ |
251,726 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
At March 31, |
|
| (in thousands) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
Geographic area long-lived assets |
|
|
|
|
|
|
|
|
United States |
|
$ |
41,792 |
|
|
$ |
37,763 |
|
Netherlands |
|
|
15,263 |
|
|
|
15,413 |
|
All other countries |
|
|
6,235 |
|
|
|
8,260 |
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
63,290 |
|
|
$ |
61,436 |
|
|
|
|
|
|
|
|
Note U — Quarterly Financial Data (Unaudited)
The following is a summary of unaudited quarterly results of operations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (in thousands, except per share data) |
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
| Year Ended March 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
79,437 |
|
|
$ |
66,908 |
|
|
$ |
75,309 |
|
|
$ |
80,320 |
|
Gross profit |
|
|
57,392 |
|
|
|
48,387 |
|
|
|
56,384 |
|
|
|
61,155 |
|
Net income from continuing operations |
|
|
15,674 |
|
|
|
10,823 |
|
|
|
14,750 |
|
|
|
16,377 |
|
Net income (loss) from discontinued
operations, net of tax |
|
|
225,728 |
|
|
|
(1,102 |
) |
|
|
(1,122 |
) |
|
|
9,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
241,402 |
|
|
$ |
9,721 |
|
|
$ |
13,628 |
|
|
$ |
25,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.37 |
|
|
$ |
0.26 |
|
|
$ |
0.35 |
|
|
$ |
0.39 |
|
Discontinued operations |
|
$ |
5.32 |
|
|
$ |
(0.03 |
) |
|
$ |
(0.03 |
) |
|
$ |
0.23 |
|
Basic earnings per share |
|
$ |
5.69 |
|
|
$ |
0.24 |
|
|
$ |
0.33 |
|
|
$ |
0.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.33 |
|
|
$ |
0.24 |
|
|
$ |
0.32 |
|
|
$ |
0.35 |
|
Discontinued operations |
|
$ |
4.58 |
|
|
$ |
(0.03 |
) |
|
$ |
(0.03 |
) |
|
$ |
0.19 |
|
Diluted earnings per share |
|
$ |
4.91 |
|
|
$ |
0.22 |
|
|
$ |
0.29 |
|
|
$ |
0.54 |
|
82
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (in thousands, except per share data) |
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
| Year Ended March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
74,126 |
|
|
$ |
58,672 |
|
|
$ |
63,072 |
|
|
$ |
72,402 |
|
Gross profit |
|
|
55,780 |
|
|
|
43,949 |
|
|
|
46,896 |
|
|
|
52,438 |
|
Net income from continuing operations |
|
|
17,075 |
|
|
|
8,182 |
|
|
|
9,246 |
|
|
|
13,576 |
|
Net income from discontinued operations,
net of tax |
|
|
5,400 |
|
|
|
3,936 |
|
|
|
3,498 |
|
|
|
1,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
22,475 |
|
|
$ |
12,118 |
|
|
$ |
12,744 |
|
|
$ |
15,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.41 |
|
|
$ |
0.19 |
|
|
$ |
0.21 |
|
|
$ |
0.31 |
|
Discontinued operations |
|
$ |
0.13 |
|
|
$ |
0.09 |
|
|
$ |
0.08 |
|
|
$ |
0.03 |
|
Basic earnings per share |
|
$ |
0.54 |
|
|
$ |
0.28 |
|
|
$ |
0.29 |
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.36 |
|
|
$ |
0.18 |
|
|
$ |
0.19 |
|
|
$ |
0.28 |
|
Discontinued operations |
|
$ |
0.11 |
|
|
$ |
0.07 |
|
|
$ |
0.07 |
|
|
$ |
0.03 |
|
Diluted earnings per share |
|
$ |
0.47 |
|
|
$ |
0.25 |
|
|
$ |
0.26 |
|
|
$ |
0.31 |
|
83
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
| |
|
Balance at |
|
|
Charged |
|
|
|
|
|
|
Balance at |
|
| |
|
Beginning |
|
|
to Costs and |
|
|
|
|
|
|
End of |
|
| Description |
|
of Period |
|
|
Expenses |
|
|
Deductions |
|
|
Period |
|
Year Ended March 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
4,616 |
|
|
|
1,524 |
|
|
|
1,606 |
|
|
$ |
4,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty reserves |
|
$ |
13,603 |
|
|
$ |
3,930 |
|
|
$ |
3,225 |
|
|
$ |
14,308 |
|
Product liability reserves |
|
|
6,701 |
|
|
|
418 |
|
|
|
564 |
|
|
|
6,555 |
|
Accrued sales returns and allowances |
|
|
15,544 |
|
|
|
12,651 |
|
|
|
9,605 |
|
|
|
18,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35,848 |
|
|
$ |
16,999 |
|
|
$ |
13,394 |
|
|
$ |
39,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
3,839 |
|
|
$ |
1,804 |
|
|
$ |
1,027 |
|
|
$ |
4,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty reserves |
|
$ |
12,025 |
|
|
$ |
4,282 |
|
|
$ |
2,704 |
|
|
$ |
13,603 |
|
Product liability reserves |
|
|
5,232 |
|
|
|
1,732 |
|
|
|
263 |
|
|
|
6,701 |
|
Accrued sales returns and allowances |
|
|
13,162 |
|
|
|
9,049 |
|
|
|
6,667 |
|
|
|
15,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
30,419 |
|
|
$ |
15,063 |
|
|
$ |
9,634 |
|
|
$ |
35,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
3,560 |
|
|
$ |
1,113 |
|
|
$ |
834 |
|
|
$ |
3,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty reserves |
|
$ |
12,052 |
|
|
$ |
3,306 |
|
|
$ |
3,333 |
|
|
$ |
12,025 |
|
Product liability reserves |
|
|
4,530 |
|
|
|
915 |
|
|
|
213 |
|
|
|
5,232 |
|
Accrued sales returns and allowances |
|
|
11,327 |
|
|
|
8,697 |
|
|
|
6,862 |
|
|
|
13,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
27,909 |
|
|
$ |
12,918 |
|
|
$ |
10,408 |
|
|
$ |
30,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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
|
|
| DATE: May 30, 2007 |
/s/JOSHUA H. LEVINE
|
|
| |
Joshua H. Levine |
|
| |
President and Chief Executive
Officer |
|
| |
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:
| |
|
|
|
|
| Signatures |
|
Title |
|
Date Signed |
| |
/s/Joshua H. Levine
Joshua H. Levine
|
|
President and Chief Executive Officer
(Principal Executive Officer)
|
|
May 30, 2007 |
|
|
|
|
|
/s/Loren L. McFarland
Loren L. McFarland
|
|
Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
|
|
May 30, 2007 |
|
|
|
|
|
/s/Joseph E. Whitters
Joseph E. Whitters
|
|
Chairman of the Board
|
|
May 30, 2007 |
|
|
|
|
|
/s/Michael L. Emmons
Michael L. Emmons
|
|
Director
|
|
May 30, 2007 |
|
|
|
|
|
/s/Walter W. Faster
Walter W. Faster
|
|
Director
|
|
May 30, 2007 |
|
|
|
|
|
/s/Margaret H. Jordan
Margaret H. Jordan
|
|
Director
|
|
May 30, 2007 |
|
|
|
|
|
/s/Katherine S. Napier
Katherine S. Napier
|
|
Director
|
|
May 30, 2007 |
|
|
|
|
|
/s/Ronald J. Rossi
Ronald J. Rossi
|
|
Director
|
|
May 30, 2007 |
85
EXHIBIT INDEX
| |
|
|
| Item Number |
|
|
2.1
|
|
Binding Offer Letter from Coloplast A/S regarding purchase of
Mentor Urology Business dated March 27, 2006 — Incorporated
by reference to Exhibit 2.1 of the Registrant’s Annual Report
on Form 10-K for the year ended March 31, 2006. |
|
|
|
2.2
|
|
Revised Binding Offer Letter from Coloplast A/S regarding
purchase of Mentor Urology Business dated May 5, 2006
Including Appendix A — Incorporated by reference to Exhibit
2.2 of the Registrant’s Annual Report on Form 10-K for the
year ended March 31, 2006. |
|
|
|
2.3
|
|
Purchase Agreement between Coloplast A/S and Mentor
Corporation dated May 17, 2006 — Incorporated by reference to
Exhibit 2.3 of the Registrant’s Annual Report on Form 10-K for
the year ended March 31, 2006. |
|
|
|
2.4
|
|
Listing Schedules for Purchase Agreement between Coloplast A/S
and Mentor Corporation dated May 17, 2006 — Incorporated by
reference to Exhibit 2.4 of the Registrant’s Annual Report on
Form 10-K for the year ended March 31, 2006. |
|
|
|
2.5
|
|
Side Letter Agreement Between Coloplast A/S and Mentor
Corporation dated June 2, 2006 — Incorporated by reference to
Exhibit 2.5 of the Registrant’s Annual Report on Form 10-K for
the year ended March 31, 2006. |
|
|
|
3.1
|
|
Composite Restated Articles of Incorporation of the Company
dated December 12, 2002 — Incorporated by reference to
Exhibit 3.1 of the Registrant’s Annual Report on Form 10-K for
the year ended March 31, 2003. |
|
|
|
3.2
|
|
Amended and Restated Bylaws of Mentor Corporation dated
September 14, 2005 — Incorporated by reference to Exhibit 3.2
of the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2005. |
|
|
|
4.1
|
|
Indenture 23/4% Convertible Subordinated Notes Due 2024, dated
December 22, 2003 —Incorporated by reference to Exhibit 4.1
of the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended December 31, 2003. |
|
|
|
10.1*
|
|
Mentor Corporation 1991 Stock Option Plan — Incorporated by
reference to Registration Statement on Form S-8, Registration
No. 333-48815, filed June 24, 1992. |
|
|
|
10.2*
|
|
Mentor Corporation 2000 Stock Option Plan — Incorporated by
reference to Registration Statement on Form S-8, Registration
No. 333-73306, filed November 14, 2001. |
|
|
|
10.3*
|
|
Mentor Corporation 1991 Stock Option Plan — Incorporated by
reference to Registration Statement on Form S-8, Registration
No. 333-100841, filed October 30, 2002. |
|
|
|
10.4*
|
|
Mentor Corporation Employee Stock Purchase Plan —
Incorporated by reference to Exhibit 10.9 of the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended September
30, 2005. |
|
|
|
10.5
|
|
Lease Agreement, dated November 1989, between Mentor
Corporation and Skyway Business Center Joint Venture —
Incorporated by reference to Exhibit 10(b) of the Registrant’s
Annual Report on Form 10-K for the year ended March 31, 2002. |
|
|
|
10.6
|
|
First Amendment to Lease Agreement, dated December 1, 1993,
between Mentor Corporation and Skyway Business Center Joint
Venture — Incorporated by reference to Exhibit 10(c) of the
Registrant’s Annual Report on Form 10-K for the year ended
March 31, 2002. |
86
EXHIBIT INDEX (continued)
| |
|
|
| Item Number |
|
|
10.7
|
|
Lease Agreement, dated July 23, 1990, between
Mentor Corporation and SB Corporate Center, Ltd.,
covering 201 Mentor Drive, Santa Barbara, CA 93111
— Incorporated by reference to Exhibit 10(f) of
the Registrant’s Annual Report on Form 10-K for the
year ended March 31, 2003. |
|
|
|
10.8
|
|
Lease Agreement, dated August 19, 1998, between Mentor Corporation
and SB Corporate Center, LLC, covering 301 Mentor Drive —
Incorporated by reference to Exhibit 10(n) of the Registrant’s
Annual Report on Form 10-K for the year ended March 31, 1999. |
|
|
|
10.9
|
|
Convertible Note Hedge Confirmation, dated December 17, 2003 —
Incorporated by reference to Exhibit 10(b) of the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended December 31,
2003. |
|
|
|
10.10
|
|
Registration Rights Agreement — 23/4% Convertible Subordinated Notes
Due 2024, dated December 22, 2003 — Incorporated by reference to
Exhibit 10(c) of the Registrant’s Quarterly Report on Form 10-Q for
the quarter ended December 31, 2003. |
|
|
|
10.11
|
|
Warrants Confirmation, dated December 17, 2003 — Incorporated by
reference to Exhibit 10(d) of the Registrant’s Quarterly Report on
Form 10-Q for the quarter ended December 31, 2003. |
|
|
|
10.12
|
|
Purchase Agreement — 23/4% Convertible Subordinated Notes Due 2024,
dated December 17, 2003 — Incorporated by reference to Exhibit
10(e) of the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended December 31, 2003. |
|
|
|
10.13
|
|
Collared Accelerated Share Repurchase Transaction, dated March 8,
2004 — Incorporated by reference to Exhibit 10.29 of the
Registrant’s Annual Report on Form 10-K for the year ended March
31, 2004. |
|
|
|
10.14*
|
|
Amendment to Employment Agreement between Mentor Corporation and
Eugene Glover, effective April 9, 2004 — Incorporated by reference
to Exhibit 10.32 of the Registrant’s Annual Report on Form 10-K for
the year ended March 31, 2004. |
|
|
|
10.15
|
|
Exclusive Supply Agreement between Alchemy Engineering, LLC d/b/a
SiTech, LLC and Mentor Corporation — Incorporated by reference to
Exhibit 10.33 of the Registrant’s Annual Report on Form 10-K for
the year ended March 31, 2004. |
|
|
|
10.16*
|
|
Employment Agreement dated July 15, 2004, between Mentor
Corporation and Peter Shepard — Incorporated by reference to
Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2004. |
|
|
|
10.17*
|
|
Employment Agreement dated July 27, 2004, between Mentor
Corporation and Bobby Purkait — Incorporated by reference to
Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2004. |
|
|
|
10.18*
|
|
Employment Agreement dated August 6, 2004, between Mentor
Corporation and Adel Michael — Incorporated by reference to
Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2004. |
87
EXHIBIT INDEX (continued)
| |
|
|
| Item Number |
|
|
10.20*
|
|
Employment Agreement between Mentor Corporation and Loren L. McFarland dated
August 25, 2005 — Incorporated by reference to Exhibit 10.2 of the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2005. |
|
|
|
10.21*
|
|
Employment Agreement between Mentor Corporation and Kathleen M. Beauchamp
dated August 25, 2005 — Incorporated by reference to Exhibit 10.3 of the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2005. |
|
|
|
10.22*
|
|
Employment Agreement between Mentor Corporation and David J. Adornetto dated
August 25, 2005 — Incorporated by reference to Exhibit 10.4 of the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2005. |
|
|
|
10.23*
|
|
Employment Agreement between Mentor Corporation and A. Christopher Fawzy
dated August 25, 2005 — Incorporated by reference to Exhibit 10.5 of the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2005. |
|
|
|
10.24*
|
|
Employment Agreement between Mentor Corporation and Cathy S. Ullery dated
August 25, 2005 —Incorporated by reference to Exhibit 10.6 of the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2005. |
|
|
|
10.25*
|
|
Employment Agreement between Mentor Corporation and Clarke Scherff dated
August 25, 2005 — Incorporated by reference to Exhibit 10.4 of the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2006. |
|
|
|
10.26
|
|
Amended and Restated Supply Agreement, dated July 6, 2004 by and among
NuSil Corporation, SiTech Inc., and Mentor Corporation — Incorporated by
reference to Exhibit 10.9 of the Registrant’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004. |
|
|
|
10.27*
|
|
Mentor Corporation Option Agreement — Incorporated by reference to Exhibit
10.3 of the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004. |
|
|
|
10.28
|
|
Lease Agreement, dated March 17, 2004 between University Research Park,
Incorporated, and Mentor Corporation covering 535 Science Drive, Suites A,
B, C and D, Madison, Wisconsin —Incorporated by reference to Exhibit 10.42
of the Registrant’s Annual Report on Form 10-K for the year ended March 31,
2005. |
|
|
|
10.29*
|
|
Severance Agreement and Release dated February 16, 2005, between Mentor
Corporation and Christopher J. Conway — Incorporated by reference to
Exhibit 10.43 of the Registrant’s Annual Report on Form 10-K for the year
ended March 31, 2005. |
|
|
|
10.30*
|
|
Severance Agreement and Release dated February 17, 2005, between Mentor
Corporation and Adel Michael — Incorporated by reference to Exhibit 10.44
of the Registrant’s Annual Report on Form 10-K for the year ended March 31,
2005. |
|
|
|
10.31*
|
|
Release of Claims Agreement dated March 25, 2005, between Mentor
Corporation and Bobby Purkait — Incorporated by reference to Exhibit 10.45
of the Registrant’s Annual Report on Form 10-K for the year ended March 31,
2005. |
|
|
|
10.32
|
|
Credit Agreement dated May 25, 2005, between Mentor Corporation, Bank of
the West, Union Bank of California, and Wells Fargo, N.A. — Incorporated
by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K
filed June 1, 2005. |
88
EXHIBIT INDEX (continued)
| |
|
|
| Item Number |
|
|
10.33
|
|
English translation of RaboBank Loan and Overdraft Facility
dated September 30, 2005 — Incorporated by reference to
Exhibit 10.1 of the Registrant’s Current Report on Form 8-K
filed on October 11, 2005. |
|
|
|
10.34*
|
|
Mentor Corporation 2005 Long-Term Incentive Plan Restricted
Stock Award Agreement — Incorporated by reference to Exhibit
10.41 of the Registrant’s Annual Report on Form 10-K for the
year ended March 31, 2006. |
|
|
|
10.35
|
|
First Amendment to Credit Agreement dated as of May 31, 2006,
amending that certain Credit Agreement, dated as of May 25,
2005, by and among Mentor Corporation, Bank of the West, as
administrative agent, Union Bank of California, N. A., as
syndication agent, Wells Fargo Bank, National Association, as
documentation agent, and the lenders from time to time party
thereto. — Incorporated by reference to Exhibit 10.1 of the
Registrant’s Current Report on Form 8-K filed on June 6, 2006. |
|
|
|
10.36
|
|
Share Repurchase Transaction dated June 5, 2006 —
Incorporated by reference to Exhibit 10.2 of the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended June 30,
2006. |
|
|
|
10.37*
|
|
Written Description of Director Fees for Non-Employee
Directors dated June 15, 2006 — Incorporated by reference to
Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2006. |
|
|
|
10.38
|
|
Mentor Corporation—Citigroup Global Markets Inc. Form 10b5-1
Stock Purchase Plan dated June 16, 2006 — Incorporated by
reference to Exhibit 10.4 of the Registrant’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2006. |
|
|
|
10.39*
|
|
Employment Agreement between Mentor Corporation and Joseph A.
Newcomb dated June 26, 2006 — Incorporated by reference to
Exhibit 10.1 of the Registrant’s Current Report on Form 8-K
filed on June 28, 2006. |
|
|
|
10.40*
|
|
Separation and Release Agreement dated June 24, 2006, between
Mentor Corporation and A. Christopher Fawzy — Incorporated by
reference to Exhibit 10.2 of the Registrant’s Current Report
on Form 8-K filed on June 28, 2006. |
|
|
|
10.41*
|
|
Consulting Agreement dated June 24, 2006, between Mentor
Corporation and A. Christopher Fawzy — Incorporated by
reference to Exhibit 10.3 of the Registrant’s Current Report
on Form 8-K filed on June 28, 2006. |
|
|
|
10.42*
|
|
Form of Executive Performance Stock Unit Award Agreement —
Incorporated by reference to Exhibit 10.4 of the Registrant’s
Current Report on Form 8-K filed on June 28, 2006. |
|
|
|
10.43*
|
|
Consulting Agreement dated June 30, 2006, between Mentor
Corporation and David Adornetto — Incorporated by reference
to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K
filed on July 6, 2006. |
|
|
|
10.44*
|
|
Mutual Release of Claims Agreement dated June 30, 2006,
between Mentor Corporation and David Adornetto — Incorporated
by reference to Exhibit 10.2 of the Registrant’s Current
Report on Form 8-K filed on July 6, 2006. |
|
|
|
10.45*
|
|
Written Description of Car Allowance Plan — Incorporated by
reference to Exhibit 10.11 of the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2006. |
89
EXHIBIT INDEX (continued)
| |
|
|
| Item Number |
|
|
10.46*
|
|
Mentor Corporation Amended 2005 Long-Term Incentive Plan effective September 13, 2006 —
Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K
filed on September 19, 2006. |
|
|
|
10.47*
|
|
Form of Indemnity Agreement — Incorporated by reference to Exhibit 10.1 of the Registrant’s
Current Report on Form 8-K filed on November 29, 2006. |
|
|
|
10.48*
|
|
Employment Agreement between Mentor Corporation and Edward S. Northup dated February 5, 2007
— Incorporated by reference to Exhibit 10.2 of the
Registrant’s Quarterly Report on Form 10-Q
for the quarter ended December 31, 2006. |
|
|
|
10.49
|
|
Second Amendment to Credit Agreement dated as of March 30, 2007, amending that certain Credit
Agreement, dated as of May 25, 2005, and first amended May 31, 2006, by and among Mentor
Corporation, Bank of the West, as administrative agent, Union Bank of California, N.A., as
syndication agent, Wells Fargo Bank, National Association, as documentation agent, and the
lenders from time to time party thereto – Incorporated by reference to Exhibit 10.1 of the
Registrant’s Current Report on Form 8-K filed on April 5, 2007. |
|
|
|
21
|
|
Subsidiaries of the Company. |
|
|
|
23
|
|
Consent of Independent Registered Public Accounting Firm. |
|
|
|
31.1
|
|
Rule 13a-15(e) and 15d-15(e) Certification — Principal Executive Officer — Joshua H. Levine. |
|
|
|
31.2
|
|
Rule 13a-15(e) and 15d-15(e) Certification — Principal Financial Officer — Loren L. McFarland. |
|
|
|
32.1
|
|
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 — Joshua H. Levine. |
|
|
|
32.2
|
|
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 — Loren L. McFarland. |
|
|
|
| * |
|
Management contract or compensatory plan or arrangement. |
90