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, 2008
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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 |
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(IRS Employer Identification No.) |
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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 o
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, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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 28, 2007), the aggregate
market value of the Common Shares of the Registrant held by non-affiliates of the Registrant was
approximately $1,314,500,013. 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, 2008, there were approximately 33,759,970 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 15, 2008 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 operating results for fiscal 2009; |
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Our expectations regarding future developments in the markets in which we compete and
intend to compete; |
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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 regulatory reviews; |
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Our anticipated outcomes of litigation; 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.
3
ITEM 1. BUSINESS.
Mentor Corporation was incorporated in Minnesota in 1969. Our fiscal year ends on March 31, and
references to fiscal 2008, fiscal 2007 or fiscal 2006 refer to the years ended March 31, 2008, 2007
or 2006, respectively.
General
We develop, manufacture, license and market a range of products serving the aesthetic medical
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 rejuvenation products including various
types of products for skin restoration. 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. We currently
operate in one business segment — aesthetic products.
Principal Products and Markets
Our aesthetic products fall into three general categories: breast aesthetics, 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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2008 |
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2007 |
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2006 |
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Amount |
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Amount |
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Amount |
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Breast aesthetics |
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$ |
328,027 |
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87.9 |
% |
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$ |
262,556 |
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87.0 |
% |
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233,189 |
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87.0 |
% |
Body contouring |
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15,212 |
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4.1 |
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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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Other aesthetics, including facial
products |
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29,969 |
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8.0 |
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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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Total |
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$ |
373,208 |
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100.0 |
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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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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 and needs of patients and surgeons.
Breast implants have applications in both cosmetic and reconstructive plastic surgery procedures.
These implants are used in augmentation procedures to enhance breast size and shape, correct breast
asymmetries and help restore fullness after breast feeding. During reconstruction procedures,
breast implants 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 at 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 $800 million to $850 million
per year.
We work actively with FDA as we seek approvals of our pre-market approval applications and our
biologic license applications, as well as when we 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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During the third quarter of fiscal 2008, we began enrollment of our botulinum toxin type
A Phase IIIb study for the treatment of glabellar rhytides (frown lines). Enrollment was
completed in January 2008. In February 2008, we began enrollment for our Phase IIIc study,
and enrollment was completed in April 2008. |
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In February 2008, FDA approval was received for Prevelle™ Silk, a hyaluronic acid dermal
filler containing lidocaine that is manufactured by Genzyme Corporation and distributed by
us. |
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Our MemoryGel™ breast implants have been approved by FDA subject to post-approval
conditions, including a Post-Approval Study (PAS). To date, we have enrolled over 33,000
patients toward the PAS enrollment goal of 42,900 patients. We anticipate concluding
enrollment by the end of calendar year 2008. |
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Our Contour Profile Gel™ breast implants submission was filed with FDA in September 2006
and is under review by the agency. |
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 second-stage operation. All CPX devices utilize our proprietary, self-sealing
BufferZone®™ 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 common applications
for extremity tissue expanders 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 per year.
Our “other aesthetics” category includes Mentor Solutions and facial aesthetics. 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 dermal filler products to be approximately $700 million to $800
million per year. Currently, in the U.S. we sell Prevelle™ Silk, a hyaluronic acid-based dermal
filler with lidocaine that is manufactured by Genzyme and is used for the correction of facial
lines and wrinkles. Outside of the U.S., we sell the following dermal filler products: (a)
Puragen Plus™, our double cross-linked hyaluronic acid-based dermal filler with lidocaine; and (b)
Prevelle™, a hyaluronic acid-based dermal filler without lidocaine that is manufactured by Genzyme.
These products complement each other by offering treatment options for a wide variety of patients
looking for wrinkle correction. We continue to pursue FDA approval for Puragen Plus in the U.S.
and for Prevelle Silk in certain territories outside of the U.S. In addition, as part of our
commercialization agreement with Genzyme, we are pursuing FDA approval of dermal gel extra, a
“next-generation” hyaluronic acid-based dermal filler product.
Our cosmeceutical products are the NIA 24™ line of science-based products that are used to improve
and restore the healthy appearance of the skin, which we distribute pursuant to an agreement with
Niadyne, Inc.
Most of our sales take place in the U.S., and the majority of such sales are not subject to
reimbursement by the government or third parties. Economic conditions can adversely affect the
sales of our products, as described in the preceding sentence, because the end-users of our
products may react to employment levels, energy and fuel costs, interest rates and other factors
that can reduce consumer discretionary spending.
We are developing a botulinum toxin type A product utilizing proprietary technology. We estimate
the worldwide market for botulinum toxin products to be greater than $1 billion per year, of which
approximately 50% relates to therapeutic uses and 50% to cosmetic use. The only therapeutic
indication that we are currently conducting clinical trials in is cervical dystonia (torticollis).
We have completed our Phase I and Phase II studies for the treatment of glabellar rhytides (frown
lines). 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. The third study
is designed to collect long term safety data over a three-year period. We have completed
enrollment in all three of our Phase III studies. Additionally, 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. This study is now closed to enrollment.
5
Sales and Marketing
We employ a direct sales force domestically for our aesthetic surgery and facial product lines, as
well as specialists to support our body contouring product line. The sales force provides product
information training, 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 fiscal 2008 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 breast aesthetics 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 support our physicians and their staff through
ongoing education at our Mentor Paragon Forum educational events. These educational symposia are
hosted around the globe and feature leading experts on the latest developments and techniques in
breast aesthetics surgery.
In February 2008 we launched a new consumer website under the domain name LoveYourLook.com. This
website features unique educational tools and support forums to help consumers educate themselves
on procedures and find qualified surgeons in their area. In addition, we recently signed a
co-marketing agreement with Le Mystere, a manufacturer of high-end lingerie and bras designed
specifically for patients undergoing breast surgery.
We contribute to organizations that provide counseling and education for patients suffering from
certain conditions (such as breast cancer survivors or breast reconstruction support
organizations), and we provide our physicians with educational materials related to our products
for use with their patients.
International Operations
We distribute 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, France, the United Kingdom, Germany, Spain, Italy and
Australia, as well as through independent distributors in other countries. Total foreign net sales
for continuing operations, (which are made through distributors and direct international sales
offices) were $116.0 million, $84.2 million and $75.5 million, in fiscal 2008, 2007 and 2006,
respectively. Other than sales made through our international sales offices, which are denominated
in the local currency of the respective sales office, international sales are generally made in
U.S. dollars.
In addition, we manufacture breast implants in the Netherlands, France and Mauritius. During
fiscal 2007, we recorded a $2.6 million impairment charge related to our decision to close our
manufacturing and research facility in Scotland. Total long-lived assets, excluding those related
to discontinued operations, located in foreign countries were $86.1 million and $21.5 million as of
March 31, 2008 and 2007, respectively.
On July 2, 2007, we purchased all of the outstanding shares of Perouse Plastie SAS (“Perouse”), a
medical device company based in Bornel, France. Perouse is a manufacturer and distributor of
silicone gel breast implants for a number of established and emerging international markets and
sells its products under the Perouse Plastie Perthese® brand. Perouse’s primary manufacturing
facility is located in France and a second facility is located in Mauritius.
For additional information regarding our international operations, see “Note U — Segment
Information for Continuing Operations” of the “Notes to Consolidated Financial Statements.”
Competition
We believe that we are one of the leading worldwide suppliers of cosmetic and reconstructive
surgery products. In the domestic breast implant market, we compete primarily with one other
company, Allergan, Inc. (“Allergan”), which acquired Inamed Corporation, our largest competitor in
the U.S. in terms of our breast aesthetics products, in March 2006. As a result of Allergan’s
acquisition of Inamed, we now compete with 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 company sizes, some of the smaller
competitors have strong positions in their home markets, which intensifies the challenges
associated with maintaining and growing our international business.
6
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 future benefit as we access their manufacturing
and research and development expertise in hyaluronic acid technology. Many competitors, both
domestically and internationally, exist in the facial aesthetics market; some of these competitors
have hyaluronic acid-based products similar to our own, while others have different products and
technologies.
Several companies are currently selling botulinum toxin products for facial aesthetics as well as
multiple therapeutic indications in global markets outside the United States. Inside the United
States, Allergan and one other company distribute the only approved botulinum toxin products,
although several other companies have botulinum toxin products in clinical trials. Those companies
are seeking additional indications and other companies are pursuing regulatory approval.
Government Regulations
General
Our
manufacturing processes and facilities are subject to continuing
review by the FDA and various
state and international 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, 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”), other federal and state agencies in the U.S., and by comparable
agencies internationally. A 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 U.S. Department of Homeland
Security regulation and oversight from time to time and could be considered for restricted entry
into the U.S. by 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, as well as any fees related to the preparation and
filing of documents required by FDA for approval, pre-market approval, or clearance. The process
of obtaining approval, 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 may also encounter
delays in bringing new products to market as a result of being required by 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.
7
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 in development and under regulatory review, such as Puragen Plus™, to be subject to
FDA regulation as medical devices.
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.
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, post-approval
study following 42,900 women for 10 years after receiving breast implants. The FDA often requires
post-approval studies to answer important questions that can only be answered once a product is in
broader use, such as the incidence of rare adverse events. Accordingly, the post-approval studies
for our MemoryGel silicone gel-filled breast implants are designed to gather information about the
implants and to provide this data to the FDA. We are incurring, and expect to continue to incur,
additional expenses in connection with the conduct of this study, which could be substantial.
In September 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
Our botulinum toxin product under development is regulated by the FDA as a biological product under
the Public Health Service Act and is 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 biological product, 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 several other agencies in
the U.S., such as the Department of Health and Human Services and the Centers for Disease Control,
due to the nature of the biological agent used to manufacture our botulinum toxin product
(Clostridium botulinum type A). The product is still in the development phase. Failure to comply
with the regulations and requirements of these various agencies could affect our ability to
manufacture and commercialize the product 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”).
In October 2006, Health Canada approved Medical Device Licenses for our round and Contour Profile
Gel silicone gel-filled breast implants.
8
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 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.
Our botulinum toxin product, which is a biologic, 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.
In addition, if our botulinum toxin is approved for therapeutic indications, it will be subject to
these coverage and reimbursement policies.
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.
CMS proposes and, after consideration of public comment, implements annual 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, which 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.
11
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:
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.
12
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. 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.
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 2008, 2007 and 2006, we
spent a total of $45.0 million, $35.0 million and $29.0 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 fillers 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, breast implant manufacturing and design 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 breast implants
and certain components used for those implants. 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 2008.
13
Our saline-filled and MemoryGel™ breast implants and other products are available for sale in the
U.S. 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.
We depend on Genzyme for the supply of Prevelle™ Silk, which is a hyaluronic acid dermal filler
product with lidocaine we distribute in the U.S. and Prevelle™, a hyaluronic acid dermal filler we
distribute internationally; 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. We also rely on a contract manufacturing facility to perform fill/finish operations for
our botulinum toxin. This facility must comply with all applicable regulations and must undergo
successful FDA inspection in order to complete our BLA.
Seasonality
Our quarterly results reflect slight seasonality, as the second fiscal quarter ending in September
tends to have the lowest revenue and profitability of all of the quarters. This is 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, 2008, we employed approximately 1,190 people, of whom 650 were in manufacturing,
288 in sales and marketing, 101 in research and development and 151 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, including $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 and the post-closing adjustment of $2.7 million was paid by us to
Coloplast in the fourth quarter of fiscal 2007. 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. As of March 31, 2008, all but $3.9 million of the initial $10 million had been released from escrow.
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.
14
Operations
associated with the Urology Business have been classified as income
(loss) 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.
Executive Officers of the Registrant
Our executive officers as of May 23, 2008 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 |
|
49 |
|
President and Chief Executive Officer |
|
|
|
|
|
Edward S. Northup |
|
59 |
|
Vice President, Chief Operating Officer |
|
|
|
|
|
Michael O’Neill |
|
48 |
|
Vice President, Chief Financial Officer and Treasurer |
|
|
|
|
|
Joseph A. Newcomb |
|
57 |
|
Vice President, General Counsel and Secretary |
Joshua H. Levine has served as President and Chief Executive Officer of Mentor Corporation since
June 2004 and was appointed to Mentor Corporation’s Board of Directors at that time. Mr. Levine
began his career with Mentor Corporation in October of 1996 as Vice President, Sales-Aesthetic
Products and advanced through positions of increasing responsibility in the aesthetic business
franchise. 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 Mentor, 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 and a member of KCI’s executive management committee. Mr. Levine began
his career in healthcare with American Hospital Supply Corporation in 1982 and advanced over the
next six years through a variety of sales and marketing management positions with that organization
and its successor, Baxter Healthcare. Mr. Levine earned his bachelor’s degree in Communications
from the University of Arizona.
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.
Michael O’Neill has served as Vice President and Chief Financial Officer since November 2007.
Prior to joining us, Mr. O’Neill was employed with Johnson & Johnson, most recently serving as the
Vice President of Finance, Worldwide Information Technology. From 2001 through 2007 Mr. O’Neill
was the Vice President of Finance, Chief Financial Officer for the Lifescan business, a $2+ billion
leading supplier of blood glucose monitoring systems. Mr. O’Neill joined Johnson & Johnson in 1987
with Site Microsurgical as a financial manager/analyst and moved
through a progressively responsible series of positions including International Controller,
Operations Controller, Finance Director and Group Finance Director before being named to the Chief
Financial Officer position at Lifescan. Mr. O’Neill received a bachelor’s degree in Economics and
Statistics from the University of Exeter, Devon, United Kingdom and is a Fellow of the Chartered
Institute of Management Accountants of Great Britain.
15
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. Mr. Newcomb is a member of the bar in
Massachusetts, Connecticut, Colorado and the District of Columbia, and is a Registered In-House
Counsel in California.
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
Investors 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.
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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.
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 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 affect 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, sales
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 or other claims or product recalls may force us to pay substantial
damage awards and other expenses that could exceed our accruals and insurance coverages.
Unexpected increases in the number of limited warranty claims for our products may surpass our
product warranty reserves.
The manufacture and sale of medical devices and biologics expose 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. Our liability with regard to products includes liability related to certain
products manufactured and/or sold by us prior to our business or product line divestitures,
including liabilities retained by us in connection with the sale of our Urology Business to Coloplast. If a
product liability claim or series of claims, including class action or consolidated 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.
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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. 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. In addition, from time to
time, we adjust the terms of our limited warranty programs which could materially impact our
reported expenses and results of operations. 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. Any delay or failure to gain regulatory approval for our products, or the ability of
our competitors to get new products, which compete with our existing products, approved before us,
could also materially adversely affect 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”), our Puragen™ Plus PMA, other 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
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biologics manufacturers to experience longer research and development timelines, longer review and 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 approval
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 and audit by government
agencies in this regard.
In addition, our competitors may have pending regulatory submissions for similar or superior
products which may gain approval before our product applications, and any such approvals could have
a material adverse effect on our business.
Our manufacturing facilities and the manufacturing facilities of our third-party suppliers are also
subject to continual governmental review and inspection as part of the product approval process and
after products are approved. 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, combination products, 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 products and to maintain and improve our competitive position. Any significant
delays in the above or termination or failure of our clinical trials or delays in our ability to
timely respond to the FDA or other regulatory authorities inquiries, requirements and requests
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.
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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.
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 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; |
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advertising in a manner that creates additional awareness and demand; and |
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marketing and selling bundled products. |
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. and internationally for our breast aesthetics
product line. As a result of Allergan’s acquisition of Inamed, we are now competing against a much
larger company with a larger portfolio of aesthetic medicine products, which may enable Allergan to
compete more effectively with us. 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. Within the U.S., we compete with Allergan, and another company
has publicly stated that it will have FDA approval of competitive products in the near future.
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 current and
former 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.
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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, reduce the demand for these surgeries or sway their
decision to purchase lower cost saline breast implants rather than MemoryGel implants, which carry
a higher selling price. Any such changes, conditions or events could have an adverse effect on our
sales and results of operations. In particular, recent weakness in the U.S. economy may adversely
affect discretionary consumer spending and may adversely affect our revenue.
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 affect sales, customer relations and results of operations.
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.
We intend to pursue the possible acquisition of other businesses and technologies to facilitate our
business strategies and future growth. There can be no assurance that we will be able to identify
appropriate acquisition candidates or technologies, 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.
In July 2007, we completed the acquisition of Perouse Plastie SAS, a medical device company based
in Bornel, France. Risks and uncertainties relating to the Perouse acquisition that may adversely
affect our future sales and results of operations include that the businesses of Mentor and Perouse
may not be integrated successfully, that anticipated synergies and international growth
opportunities may not be fully realized or may take longer to be realized than expected, and
possible disruption of the Perouse business, including with customers, employees, suppliers or
third parties.
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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. Additionally, many members of our senior management team have recently
joined the company. 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.
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, damages, 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 or at all.
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We also depend on third-party manufacturers and suppliers for components
and licensed products. We depend on Genzyme for the supply of dermal filler products, 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. 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. We also rely on a third party contract manufacturing vendor for fill/finish of our
botulinum toxin product. If that vendor fails to pass regulatory inspections or has a business
interruption, there would be a significant adverse effect on our ability to commercialize the
product.
Our international business exposes us to a number of risks.
Approximately one-third of our sales from 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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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 |
Health care reimbursement or reform legislation could materially affect our business.
If any domestic or international 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 sales and profitability and 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 is 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 operations,
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
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. In addition, pursuant to
the terms of our agreement with Coloplast for the sale of our Urology Business, we may have
continuing direct liability or liability through our indemnification provisions, for any violations
in connection with our Urology Business 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 France, we are subject to regulation by the
Ministry of Environment. In Mauritius, we are subject to regulation by the Department of
Environment.
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.
Changes in financial accounting standards may cause adverse unexpected revenue or expense
fluctuations and affect our reported results of operations.
New or recently adopted 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.
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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 31, 2008,
the closing price of our common stock on the New York Stock Exchange was $25.72 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 $28.9158 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 set forth above and other factors, many of which are beyond our control
including such factors as changes in pricing policies or the introduction of new products 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 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.
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 $38.9251 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.
Our Restated Articles of Incorporation provide our Board with the authority to issue “blank check”
preferred stock. The issuance of “blank check” preferred stock could adversely affect the market
price and the rights and powers, including voting rights, of our common stock, and decrease the
amount of earnings and assets allocable to or available for distribution to holders of our common
stock.
Our Restated Articles of Incorporation provide for the issuance of preferred stock in one or more
series, with rights, preferences, privileges and restrictions to be determined by the Board in its
discretion.
The preferred stock could be or become convertible into common stock, which may be perceived as
having a protective effect on our existing shareholders and having the effect of deterring
unsolicited or hostile takeover attempts. The preferred stock is designed to provide our Board of
Directors with the flexibility to issue such preferred stock, should they, at some time in the
future, determine that such measures are necessary or desirable.
Any future issuance of preferred stock could affect our shareholders in a number of respects. If
we issue preferred stock convertible into common stock or other securities that have rights,
preferences and privileges senior to those of our common stock, the holders of our common stock may
suffer significant dilution. In addition, the issuance of any shares of preferred stock, including
preferred stock convertible into common stock, could adversely affect the market price of our
common stock.
Any preferred stock issued would have priority over the common stock upon liquidation and might
have priority rights as to dividends, voting and other features. Accordingly, the issuance of
preferred stock could decrease the amount of earnings and assets allocable to or available for
distribution to holders of common stock and adversely affect the rights and powers, including
voting rights, of the common stock.
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Our Board of Directors may also issue preferred stock in connection with such activities as public
or private offerings of shares for cash, acquisitions of other companies and other financing
opportunities. We do not have any current plans, commitments, arrangements or agreements, written
or otherwise, to issue or designate any of our blank check preferred stock.
Our Board of Directors may also choose to consider adopting a shareholder rights plan, or “poison
pill,” as an anti-takeover defense at some future point. Shareholder rights plans involve the
issuance to common shareholders of a right to purchase shares of convertible preferred stock under
certain circumstances. In order to implement such a plan, the Board of Directors must have the
ability to create and issue a class of preferred stock with certain terms and we must also have
available sufficient shares of common stock to effect the conversion. A future issuance of blank
check preferred stock and/or the subsequent adoption of a shareholder rights plan (which would then
be possible) could prevent or deter the acquisition by a third party, especially if the transaction
was not previously approved by our Board of Directors. Our shareholders will be solely reliant
upon the business judgment of our Board of Directors regarding the various terms and conditions
which may be ascribed to any series of preferred stock created in the future. Moreover, the ability
to designate and issue new series of blank check preferred stock without additional shareholder
action or vote deprives shareholders of notice that such actions are being considered and of
providing input in the process.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
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 and warehousing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,000 |
|
|
|
|
|
|
|
|
|
Leased Properties |
|
|
|
|
|
|
Texas
|
|
149,000 |
|
Manufacturing, warehousing and administrative offices |
|
|
|
|
|
|
|
California
|
|
124,000 |
|
Corporate offices, research and development, and sales
and marketing |
|
|
|
|
|
|
|
Arizona
|
|
32,000 |
|
Manufacturing, warehousing and administrative offices |
|
|
|
|
|
|
|
Mauritius
|
|
32,000 |
|
Manufacturing and warehousing |
|
|
|
|
|
|
|
France
|
|
27,000 |
|
Manufacturing, warehousing and administrative offices |
|
|
|
|
|
|
|
United Kingdom
|
|
11,000 |
|
Warehousing and administrative offices |
|
|
|
|
|
|
|
Canada
|
|
11,000 |
|
Sales, warehousing and administrative offices |
|
|
|
|
|
|
|
Wisconsin
|
|
10,000 |
|
Research and development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
396,000 |
|
|
26
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 one 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 four countries where we lease office and warehouse
space ranging from 2,000 to 8,000 square feet. We also lease approximately 400,000 square feet of
land located in Madison, Wisconsin for purposes of constructing a new manufacturing, distribution
and office facility, planned to be approximately 35,000 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 N “Commitments” under “Notes to
Consolidated Financial Statements.”
ITEM 3. LEGAL PROCEEDINGS.
We have been served with various lawsuits filed against us in several jurisdictions related to
ObTape, an implantable product used to treat female urinary incontinence that was sold by us
through our discontinued Urology Business between 2003 and 2006. The lawsuits were filed between
April 13, 2006 and May 27, 2008. These complaints, filed on behalf of patients who were implanted
with ObTape, assert product liability and other claims and seek compensatory damages in unspecified
amounts, and, in some cases, seek punitive damages and the granting of extraordinary equitable
relief. We deny the allegations and regard them as without merit, and we intend to defend
the lawsuits vigorously. Management is unable to determine the financial statement impact, if any,
of these legal proceedings.
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, 2008.
27
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 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, 2008 |
|
High |
|
|
Low |
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2008 |
|
$ |
40.82 |
|
|
$ |
23.95 |
|
|
|
|
|
|
|
|
|
|
Quarter ended December 28, 2007 |
|
$ |
47.99 |
|
|
$ |
35.72 |
|
|
|
|
|
|
|
|
|
|
Quarter ended September 28, 2007 |
|
$ |
48.80 |
|
|
$ |
39.00 |
|
|
|
|
|
|
|
|
|
|
Quarter ended June 29, 2007 |
|
$ |
49.90 |
|
|
$ |
38.08 |
|
| |
|
|
|
|
|
|
|
|
| Year Ended March 31, 2007 |
|
High |
|
|
Low |
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2007 |
|
$ |
53.40 |
|
|
$ |
45.59 |
|
|
|
|
|
|
|
|
|
|
Quarter ended December 29, 2006 |
|
$ |
54.40 |
|
|
$ |
44.49 |
|
|
|
|
|
|
|
|
|
|
Quarter ended September 29, 2006 |
|
$ |
50.94 |
|
|
$ |
40.22 |
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, 2006 |
|
$ |
45.31 |
|
|
$ |
37.25 |
|
The closing sales price of our common stock as of May 23, 2008, was $29.18 per share. According to
the records of our transfer agent, there were approximately 741 holders of record of our common
stock on May 23, 2008. However, the majority of shares are held by brokers and other institutions
on behalf of shareholders.
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 of Directors 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, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
First Quarter |
|
$ |
0.20 |
|
|
$ |
0.18 |
|
|
$ |
0.17 |
|
Second Quarter |
|
|
0.20 |
|
|
|
0.18 |
|
|
|
0.18 |
|
Third Quarter |
|
|
0.20 |
|
|
|
0.18 |
|
|
|
0.18 |
|
Fourth Quarter |
|
|
0.20 |
|
|
|
0.20 |
|
|
|
0.18 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0.80 |
|
|
$ |
0.74 |
|
|
$ |
0.71 |
|
|
|
|
|
|
|
|
|
|
|
Issuer Purchases of Equity Securities
During the three months ended March 31, 2008, the Company repurchased 2,000 shares for the payment
of withholding taxes related to the lapsing of restrictions on certain outstanding restricted stock
grants. On June 18, 2007, we entered into a stock purchase plan (“2007 10b5 Plan”) with Citigroup
Global Markets Inc. for the purpose of repurchasing our common stock, up to a cumulative purchase
price of $200 million, under a Rule 10b5-1 Plan compliant with Rule 10b-18. We made no purchases
under the 2007 10b5 Plan during the three month period ended March 31, 2008.
28
The table below sets forth certain share repurchase information for the quarter ended March 31,
2008.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ISSUER PURCHASES OF EQUITY SECURITIES(1) (2) (3) |
|
| |
|
|
|
|
|
|
|
|
|
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 2008 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
811 |
|
| February 2008 |
|
|
2 |
(4) |
|
|
31.79 |
|
|
|
— |
|
|
|
809 |
|
| March 2008 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
2 |
|
|
$ |
31.79 |
|
|
|
— |
|
|
|
809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
During the period, no shares were purchased under the 2007 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 31.0 million shares, including 5.0 million, 1.7 million and 5.0 million shares in
June 2007, 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. The 2007 10b5 Plan will terminate on June 17, 2008. |
| |
| (4) |
|
Balance includes approximately 2,000 shares repurchased for payment of withholding taxes upon the vesting of certain restricted stock grants. |
29
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial information presented below is obtained from our audited
consolidated financial statements. 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) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Statement of Income Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
373,208 |
|
|
$ |
301,974 |
|
|
$ |
268,272 |
|
|
$ |
251,726 |
|
|
$ |
218,437 |
|
Gross profit |
|
|
274,213 |
|
|
|
223,318 |
|
|
|
199,063 |
|
|
|
187,150 |
|
|
|
157,854 |
|
Operating income from continuing operations |
|
|
79,071 |
|
|
|
65,629 |
|
|
|
69,065 |
|
|
|
65,381 |
|
|
|
66,206 |
|
Income before income taxes -
continuing operations |
|
|
78,324 |
|
|
|
82,172 |
|
|
|
67,685 |
|
|
|
62,745 |
|
|
|
67,251 |
|
Income taxes — continuing operations |
|
|
23,373 |
|
|
|
24,548 |
|
|
|
19,606 |
|
|
|
19,937 |
|
|
|
21,479 |
|
Income from continuing operations |
|
|
54,951 |
|
|
|
57,624 |
|
|
|
48,079 |
|
|
|
42,808 |
|
|
|
45,772 |
|
Discontinued operations, net of income tax(1) |
|
|
8,464 |
|
|
|
232,990 |
|
|
|
14,278 |
|
|
|
12,073 |
|
|
|
9,007 |
|
Net income |
|
$ |
63,415 |
|
|
$ |
290,614 |
|
|
$ |
62,357 |
|
|
$ |
54,881 |
|
|
$ |
54,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
1.55 |
|
|
$ |
1.37 |
|
|
$ |
1.12 |
|
|
$ |
1.02 |
|
|
$ |
1.00 |
|
Discontinued operations(1) |
|
$ |
0.24 |
|
|
$ |
5.55 |
|
|
$ |
0.33 |
|
|
$ |
0.29 |
|
|
$ |
0.20 |
|
Basic earnings per share |
|
$ |
1.79 |
|
|
$ |
6.93 |
|
|
$ |
1.45 |
|
|
$ |
1.31 |
|
|
$ |
1.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
1.40 |
|
|
$ |
1.24 |
|
|
$ |
1.01 |
|
|
$ |
0.93 |
|
|
$ |
0.95 |
|
Discontinued operations(1) |
|
$ |
0.20 |
|
|
$ |
4.75 |
|
|
$ |
0.28 |
|
|
$ |
0.24 |
|
|
$ |
0.18 |
|
Diluted earnings per share |
|
$ |
1.61 |
|
|
$ |
5.99 |
|
|
$ |
1.29 |
|
|
$ |
1.17 |
|
|
$ |
1.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common share |
|
$ |
0.80 |
|
|
$ |
0.74 |
|
|
$ |
0.71 |
|
|
$ |
0.66 |
|
|
$ |
0.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
35,375 |
|
|
|
41,960 |
|
|
|
42,995 |
|
|
|
41,921 |
|
|
|
45,543 |
|
Diluted |
|
|
41,449 |
|
|
|
49,092 |
|
|
|
50,870 |
|
|
|
49,667 |
|
|
|
49,272 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (continuing operations): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital(3) |
|
$ |
171,873 |
|
|
$ |
534,163 |
|
|
$ |
210,135 |
|
|
$ |
155,688 |
|
|
$ |
155,532 |
|
Total assets(3) |
|
|
440,579 |
|
|
|
709,768 |
|
|
|
391,771 |
|
|
|
311,962 |
|
|
|
312,236 |
|
Long-term accrued liabilities, less current
portion(3) |
|
|
27,536 |
|
|
|
21,683 |
|
|
|
19,100 |
|
|
|
22,639 |
|
|
|
19,148 |
|
Convertible subordinated notes |
|
|
150,000 |
|
|
|
150,000 |
|
|
|
150,000 |
|
|
|
150,000 |
|
|
|
150,000 |
|
Shareholders’ equity |
|
$ |
143,034 |
|
|
$ |
434,868 |
|
|
$ |
226,589 |
|
|
$ |
172,527 |
|
|
$ |
196,004 |
|
| |
|
|
| (1) |
|
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 T — Discontinued Operations” in the
“Notes to Consolidated Financial Statements.” |
| |
| (2) |
|
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. |
| |
| (3) |
|
Prior years have 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) 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). As a result of the sale to Coloplast, 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
medical market. We intend to leverage our traditional strengths in plastic surgery and grow our
market presence in cosmetic dermatology. For further information regarding this divestiture, see
Note T of the Notes to Consolidated Financial Statements. We currently operate one business
segment — aesthetic products.
We are headquartered in Santa Barbara, California, with manufacturing and research operations in
the United States, the Netherlands, France and Mauritius, and employ approximately 1,190 people
around the world. We 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, royalties, amortization of
certain intangibles, 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 costs and warranty reserves, the purchase accounting treatment of acquired
inventory, amortization and changes in manufacturing processes and yields.
In addition to our U.S. sales, we sell most of our product lines outside 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, France, United Kingdom, Germany, Spain, Italy and
Australia, as well as through independent distributors in other countries. Our manufactured
products are mainly supplied by our plants in the U.S., the Netherlands and France. Our plants in
the Netherlands and France serve our international branches and distributors. Our U.S. plant
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 incorporate the costs of accounting, human
resources, information services, equity compensation expense, certain intangible amortization,
business development, legal and insurance costs.
31
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, contract services, other outside costs and costs related to our post-approval conditions.
We also conduct research on materials technology, manufacturing processes, product design and
product improvement options.
Perouse Acquisition
On July 2, 2007 we purchased all of the outstanding shares of Perouse Plastie SAS (Perouse).
Perouse is an international breast implant manufacturer based in France that currently supplies a
complete range of breast aesthetics products, primarily for the European and Latin American markets.
We paid $53.5 million in cash (net of cash acquired). In addition, we incurred approximately $0.4
million in acquisition costs, bringing the total purchase price to $53.9 million.
Important Factors
Management currently considers the following events, trends and uncertainties to be important to
understanding our financial condition and operating performance:
| |
• |
|
The performance of the U.S. economy will impact the demand for our products in the U.S. in
fiscal 2009, and continued weakness in the U.S. economy could put pressure on our revenue
growth; |
| |
| |
• |
|
We are in the midst of a transition in the U.S. from saline breast implants to MemoryGel
breast implants that we expect will continue over a several year period with potentially
uneven rates of change that could cause revenues and profits to fluctuate quarter to quarter;
and |
| |
| |
• |
|
We are committed to investing in the development and marketing of new aesthetics products
to expand our product portfolio, which may have the effect in the short term of increasing
our expenses faster than our revenues are anticipated to increase. |
Our focus in fiscal year 2009 will be on those activities within the aesthetic business that we can
influence and control, including the following:
| |
• |
|
competing to grow U.S. breast aesthetics market share through targeted marketing programs; |
| |
| |
• |
|
supporting the continued transition in the U.S. from saline breast implants to MemoryGel
breast implants; |
| |
| |
• |
|
launching our entry in the U.S. dermal filler market with Prevelle Silk; |
| |
| |
• |
|
continuing our international breast aesthetics growth strategy by leveraging the Perouse
acquisition and investing in management and marketing infrastructure; and |
| |
| |
• |
|
investing in research and development programs to expand our product portfolio and create
incremental product bundling opportunities that will allow us to better serve customers. |
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.
32
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 in connection with a
sale of such a warranty 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, 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.
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. In the case of inventory acquired in an
acquisition, inventory is valued at fair value. 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 and free product
replacement. 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.
33
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 information developed
using actuarial techniques. The accrual is analyzed periodically for adequacy. As a result of
these periodic analyses, we recorded adjustments reducing our warranty reserves by $3.7 million
during fiscal 2008 relating to pre-existing warranties.
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 and retention levels. 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; or in the case
of products related to discontinued operations, including urology products or ophthalmic products,
cost are recorded in discontinued operations. 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 or discontinued operations, 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 indefinite-lived 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
indicated certain impaired assets, for which we recorded an impairment charge. These impairment
charges are included in the results of operations. Our tests performed in fiscal 2008 and 2006 did
not indicate impairment. See Note I — “Intangible Assets and Goodwill” of the Notes to
Consolidated Financial Statements.
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 performance stock units to be recognized in our financial statements
based on their respective grant date fair values. Under this standard, the fair value of each
equity grant to an employee 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 related to stock option grants. The fair value of our
restricted stock units is based on the fair market value of our common stock on the date of grant
and the fair value of our Performance Stock Units (“PSUs”) is estimated using a Monte Carlo
simulation model.
34
The Black-Scholes model used to value our stock option grants 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 stock option grants 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 data. 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.
Stock-based compensation expense recognized in our financial statements is based on awards that are
ultimately expected to vest. The amount of stock-based compensation expense 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.
Deferred Income Taxes
Our effective tax rate reflects the impact of undistributed foreign earnings for which no U.S.
taxes have been provided because such earnings are intended to be invested indefinitely outside the
United States based on our projected cash flow, working capital and long-term investment
requirements of our U.S. and foreign operations. If future events, including material changes in
estimates of cash, working capital and long-term investment requirements necessitate that certain
assets associated with these earnings be repatriated to the United States, an additional tax
provision and related liability would be required which could materially impact our future
effective tax rate. We recognize deferred tax assets and liabilities for temporary differences
between the financial reporting basis and the tax basis of our assets and liabilities along with
net operating loss and tax credit carryovers.
Effective April 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation
No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109
(FIN 48), which prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. Under FIN 48, the tax benefit from uncertain tax positions may be recognized only if it is
more likely than not that the tax position will be sustained, based solely on its technical merits,
with the taxing authority having full knowledge of all relevant information. We recognize deferred
tax assets and liabilities for temporary differences between the financial reporting basis and the
tax basis of our assets and liabilities along with net operating loss and tax credit carryovers
only for tax positions that meet the more likely than not recognition criteria. We record a
liability for unrecognized tax benefits from uncertain tax positions as discrete tax adjustments in
the first interim period that the more likely than not threshold is not met. Due to the inherent
risks in the estimates and assumptions used in determining the sustainability of our tax positions
and in the measurement of the related tax, our provision for income taxes and our effective tax
rate may vary significantly from our estimates and from amounts reported in future or prior
periods. We discuss this change in accounting principle and its effect on our consolidated
financial statements in Note H of the 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, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
26.5 |
% |
|
|
26.0 |
% |
|
|
25.8 |
% |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
73.5 |
% |
|
|
74.0 |
% |
|
|
74.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative |
|
|
40.2 |
% |
|
|
39.8 |
% |
|
|
37.7 |
% |
Research and development |
|
|
12.1 |
% |
|
|
11.6 |
% |
|
|
10.8 |
% |
Long-lived asset impairment charges |
|
|
— |
|
|
|
0.9 |
% |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Operating income from continuing operations |
|
|
21.2 |
% |
|
|
21.7 |
% |
|
|
25.7 |
% |
Interest expense |
|
|
(1.5 |
)% |
|
|
(2.0 |
)% |
|
|
(2.1 |
)% |
Interest income |
|
|
2.1 |
% |
|
|
7.4 |
% |
|
|
1.5 |
% |
Other (expense) income, net |
|
|
(0.8 |
)% |
|
|
0.0 |
% |
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
21.0 |
% |
|
|
27.1 |
% |
|
|
25.2 |
% |
Income taxes |
|
|
6.3 |
% |
|
|
8.1 |
% |
|
|
7.3 |
% |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
14.7 |
% |
|
|
19.0 |
% |
|
|
17.9 |
% |
Income (loss) from discontinued operations, net of tax |
|
|
(0.0 |
)% |
|
|
0.5 |
% |
|
|
5.3 |
% |
Gain on sale of discontinued operations, net of tax |
|
|
2.3 |
% |
|
|
76.7 |
% |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
17.0 |
% |
|
|
96.2 |
% |
|
|
23.2 |
% |
|
|
|
|
|
|
|
|
|
|
YEARS ENDED MARCH 31, 2008 AND 2007
Net Sales
Net sales increased 24% to $373.2 million, compared to $302.0 million in the prior year. Foreign
exchange rate movements, primarily the stronger Euro, Canadian Dollar and British Pound, over the
prior year had a favorable year-to-year impact on sales of $5.1 million. The increase in net sales
was primarily the result of a 25% increase in total sales of breast aesthetic products to $328.0
million for fiscal 2008 from $262.6 million for the same period in the prior year. Increased
breast aesthetic sales were driven by growth in MemoryGel™ silicone-gel breast implants
across all markets. These increases were due primarily to regulatory approval of these products in
the U.S. and Canada during the third quarter of fiscal 2007. Because of this regulatory approval,
during fiscal 2008, our U.S. augmentation market experienced a shift from saline-filled breast
implants to our MemoryGel™ breast implants, which carry a higher average selling price
than saline-filled breast implants. Excluding unit volume related to our Perouse acquisition, we
saw overall growth in unit sales of breast implant products of approximately 6%. Increased breast
aesthetics sales were also due in part to $14.0 million in incremental sales in the current year
from our Perouse operations. Net sales of body contouring products decreased 9% to $15.2 million
for fiscal 2008, from $16.7 million for the same period in the prior year, due in part to our
decision in the first quarter of fiscal 2007 to discontinue sale of a number of low margin products
within the body contouring product line. Other aesthetic products sales increased 32% to $30.0
million for the current year, from $22.7 million for the same period in the prior year, due in part
to increased revenue from our facial aesthetics products, including international sales of dermal
fillers and Niadyne’s NIA 24™ line of science-based cosmeceutical products which was launched
domestically in May 2006. In addition, other aesthetic product sales include $1.5 million related
to Perouse.
We anticipate that our sales in fiscal 2009 will be driven by existing products, including sales of
out MemoryGel breast implants in all markets and facial aesthetics products, primarily in the U.S.
We expect net sales in the range of $405 million to $425 million for the full fiscal year 2009.
36
Cost of Sales and Gross Profit
Gross profit increased $50.9 million to $274.2 million for fiscal 2008 from $223.3 million last
year. The gross profit percentage decreased to 73.5% of net sales for fiscal 2008 compared to
74.0% in the prior year. Fiscal 2008 included a decrease in gross profit percentage related to Perouse products, including $2.3 million of additional cost of goods sold as a result of inventory
fair value adjustments. The gross profit percentage also decreased due to inventory adjustments in our foreign offices and higher distributor sales, which tend to carry lower margins. These decreases were partially offset by
adjustments to our estimated warranty reserves of $3.7 million
which were the result of updated actuarial data. Gross profit was
further impacted
by favorable manufacturing variances. In addition, fiscal 2007 included additional inventory
reserves for the discontinuation of certain low margin product lines in our body contouring business of $1.2 million. We believe that our gross profit as a percentage of net sales will be in the range of 71% to 73% for the full
fiscal year 2009.
Selling, General and Administrative
Selling, general and administrative expenses increased to $150.2 million, or 40.2% of net sales,
for the current year compared to $120.1 million, or 39.8% of net sales, in the prior year. The
increase was primarily due to Perouse costs in fiscal 2008 of $5.7 million and $9.1 million of
higher compensation expense, including salaries, bonuses and commissions. Other increases
included $3.4 million related to higher consulting fees, $2.6 million related to foreign currency
fluctuations and $5.2 million in higher promotional and other marketing expenses. We expect
selling, general and administrative expenses to be in the range of 41% to 43% of net sales for the
full fiscal year 2009.
Research and Development
Research and development expense was $45.0 million, or 12.1% of net sales, for fiscal 2008 compared
to the $35.0 million or 11.6% of net sales reported in the same period in the prior year. This
change was primarily due to increases in development costs, including $9.1 million in combined
expense related to our botulinum toxin project and our dermal filler development program with
Genzyme. Higher costs related to the requirements of FDA post-approval conditions of $5.0 million
in the current year were partly offset by a $0.8 million decrease in clinical study costs. These
decreases were partly due to the completion of certain prior year studies and a decrease in
expenses related to our silicone gel-filled breast implant regulatory submissions in the U.S. and
Canada for which we received approval in the third quarter of fiscal 2007. In addition, fiscal
2007 includes $1.5 million in severance-related costs. We expect research and development expense
to be in the range of 10% to 12% of net sales for the full fiscal year 2009.
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 property and equipment 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 was $5.7 million and $6.2 million for fiscal 2008 and 2007, respectively. These
costs include interest on our $150 million convertible subordinated notes at 23/4% issued in December
2003, interest expense on balances outstanding under our lines of credit in the prior year,
commitment fees on our credit facilities and amortization of debt issuance costs.
Interest income decreased $14.5 million to $8.0 million for fiscal 2008 compared to $22.5 million
in the prior year, as a result of lower cash and marketable securities balances in fiscal 2008 due
mainly to share purchases under our stock buyback program and the acquisition of Perouse.
Other (expense) income primarily includes foreign currency gains or losses related to our foreign
operations. Other (expense) income for fiscal 2008 was ($3.1) million as compared to $0.2 million
for the prior year.
37
Income Taxes
Our effective tax rate was 29.8% in fiscal 2008, as compared to 29.9% in fiscal 2007.
Income, Net of Income Taxes, and Earnings per Share from Continuing Operations
Income from continuing operations was $55.0 million and $57.6 million for fiscal 2008 and 2007,
respectively. This equates to $1.55 and $1.37 basic earnings per share and $1.40 and $1.24 diluted
earnings per share for these same respective periods. We expect diluted earnings per share from
continuing operations to be in the range of $1.40 to $1.50 for the full fiscal year 2009.
Income from Discontinued Operations, Net of Income Taxes
Income from discontinued operations, net of income taxes, includes the results of our former
surgical urology and clinical and consumer healthcare business segments, which were sold to
Coloplast on June 2, 2006. For fiscal 2008, we reported a loss from discontinued operations of
$0.3 million compared to income from discontinued operations, net of income taxes, of $1.6 million
for fiscal 2007. For further details regarding discontinued operations, see Note T of the Notes to
Consolidated Financial Statements.
Gain on Sale of Discontinued Operations, Net of Income Taxes
For fiscal 2008 and 2007, we recorded a net gain of $8.7 million and $231.4 million, respectively,
after taxes and expenses related to the sale of our Urology Business. Fiscal 2008 includes an $8.8
million income tax benefit related to the gain on sale of the Urology Business. For further
details regarding discontinued operations, see Note T of the Notes to Consolidated Financial
Statements.
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.
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.
38
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 SFAS 123(R) 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.
Research and Development
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™.
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 property and equipment 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.
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.
39
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 in fiscal 2007 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 T
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 T of the Notes to Consolidated
Financial Statements.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities and from the exercise of employee stock options have been our
primary recurring sources of funds. As of March 31, 2008, we had cash, cash equivalents and
short-term marketable securities of $109.9 million, a decrease of $377.8 million from $487.7
million as of March 31, 2007. The principal components of the decrease in cash, cash equivalents
and marketable securities were cash outflows of $368.4 million for common shares repurchased under
our share repurchase program, $53.5 million related to the purchase of Perouse, $29.5 million in
dividends paid and $27.7 million used for capital expenditures, offset by cash generated from
operating activities of continuing operations of $85.5 million, proceeds of $5.9 million from the
exercise of employee stock options and stock purchases under our Employee Stock Purchase Plan and
$85.2 million in net sales of marketable securities.
During the first quarter of fiscal 2007 we completed the sale of our Urology Business to Coloplast
for total consideration of $463 million, which was subject to customary post-closing adjustments
and included $7 million of non-cash consideration consisting of the value of the indemnification by Coloplast to
us related to certain foreign tax credits. On the closing date of June 2, 2006, we received $446
million in cash from Coloplast. In addition, $10 million of the purchase price was held in an escrow account
in connection with the transaction. An additional $2 million was received from an unrelated
third party. As of March 31, 2008, all but $3.9 million of the initial $10 million had been released from escrow.
We invest excess cash in interest bearing bank deposits and 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. None of our investments
include auction rate securities.
40
The following table summarizes our cash, cash equivalents and marketable securities for the periods
noted:
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
March 31, |
|
| (in thousands) |
|
2008 |
|
|
2007 |
|
Cash and cash equivalents |
|
$ |
79,697 |
|
|
$ |
371,525 |
|
Marketable securities |
|
|
30,218 |
|
|
|
116,215 |
|
|
|
|
|
|
|
|
Total cash, cash equivalents and marketable securities |
|
$ |
109,915 |
|
|
$ |
487,740 |
|
|
|
|
|
|
|
|
Percentage of total assets |
|
|
25 |
% |
|
|
69 |
% |
Cash Flow Changes
The following table summarizes our cash flow activity:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, |
|
| (in thousands) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Net cash provided by continuing operating activities |
|
$ |
85,512 |
|
|
$ |
68,948 |
|
|
$ |
99,044 |
|
Net cash provided by (used in) continuing investing activities |
|
|
4,054 |
|
|
|
429,696 |
|
|
|
(76,052 |
) |
Net cash used in continuing financing activities |
|
|
(390,321 |
) |
|
|
(104,653 |
) |
|
|
(16,122 |
) |
Net cash provided by (used in) discontinued operations |
|
|
8,464 |
|
|
|
(121,842 |
) |
|
|
15,957 |
|
Effect of currency exchange rates on cash and cash equivalents |
|
|
463 |
|
|
|
663 |
|
|
|
(780 |
) |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
$ |
(291,828 |
) |
|
$ |
272,812 |
|
|
$ |
22,047 |
|
|
|
|
|
|
|
|
|
|
|
Cash Provided by Operating Activities of Continuing Operations
Cash provided by operating activities of continuing operations of $85.5 million, $68.9 million and
$99.0 million for fiscal 2008, 2007 and 2006, respectively, was due in part to the net impact of
non-cash adjustments to income from continuing operations. Non-cash adjustments primarily included
tax benefits from the exercise of employee stock options, non-cash compensation, depreciation,
amortization and deferred income taxes. For fiscal 2007, operating cash flows were negatively
impacted in the amount of $20.2 million by changes in working capital balances. For fiscal 2008
and 2006, operating cash flows were positively impacted by changes in working capital in the amount
of $7.3 million and $12.0 million, respectively. Our working capital was $171.9 million at March
31, 2008 and $534.2 million at March 31, 2007.
Cash Provided by (Used in) Investing Activities of Continuing Operations
Historically, cash provided by (used in) investing activities of continuing operations has been
primarily attributable to purchases and sales of marketable debt and equity securities, as well as
capital expenditures on property and equipment and intangibles. For fiscal 2008, total cash provided
by investing activities of continuing operations was $4.1 million, primarily related to
net sales of marketable securities of $85.2 million, offset by capital expenditures of $27.7 million and the purchase of Perouse for $53.5 million. For fiscal 2007, total cash provided by investing
activities of continuing operations was $429.7 million, which includes the proceeds from the sale
of the Urology Business of $455.3 million. For fiscal 2007, our net purchases of marketable securities totaled $13.6 million and our capital expenditures totaled $12.5 million. For fiscal
2006, total cash used in investing activities of continuing operations was $76.1 million. This
amount was comprised of net investments of $66.0 million in marketable securities and approximately
$10.1 million of capital expenditures. We anticipate our capital expenditures to total
approximately $30 million to $40 million in fiscal 2009, as we will continue to invest in our new
botulinum toxin manufacturing plant, facility improvements, software to support our manufacturing
processes, production equipment and milestone payments.
41
Perouse Acquisition
On July 2, 2007 we purchased all of the outstanding shares of Perouse Plastie SAS (Perouse).
Perouse is an international breast implant manufacturer based in France that currently supplies a
complete range of breast aesthetics products for the European and Latin American markets. We paid
$53.5 million in cash (net of cash acquired). In addition, we incurred approximately $0.4 million
in acquisition costs, bringing the total purchase price to $53.9 million.
The acquisition was accounted for using the purchase method of accounting and, accordingly, the
purchase price was allocated to the tangible and intangible net assets acquired on the basis of
their respective values on the acquisition date. The fair value of intangible assets acquired was
determined based upon an external valuation and for tangible assets the Company used a combination
of methods including replacement cost. The results of Perouse operations are included in our
consolidated results since acquisition date. For further information regarding this acquisition,
see Note J of the Notes to Consolidated Financial Statements.
Cash Used in Financing Activities of Continuing Operations
Net cash used in financing activities is primarily a result of our stock repurchase program, cash
used in payments of dividends, and the net impact of our debt financing activities offset by cash
provided by employee stock option exercises.
We have a share repurchase program, primarily to reduce the overall number of shares outstanding
and to offset the dilutive effect of our employee equity compensation and dilution related to our
convertible notes from the inclusion of contingently convertible debt in fully diluted earnings per
share calculations. 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 plans, if any. There is no guarantee that
shares authorized for repurchase by the Board will ultimately be repurchased.
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 “2006 10b5 Plan”) compliant with Rule 10b-18.
In connection with the entry into the 2006 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 5.0 million shares. We repurchased 4.1 million shares of our common stock under the
2006 10b5 Plan for a total purchase price of $166 million, and the 2006 10b5 Plan terminated on
June 15, 2007.
On June 18, 2007, we entered into a second Rule 10b-5 stock purchase plan compliant with Rule
10b-18 (the “2007 10b5 Plan”) with Citigroup Global Markets Inc. for the purpose of repurchasing
our common stock, up to a cumulative purchase price of $200 million. In connection with the entry
into the 2007 10b5 Plan, our Board of Directors increased the authorized number of shares available
for repurchase pursuant to our stock repurchase program by 5.0 million shares. As of March 31,
2008, we have repurchased 4.8 million shares of our common stock under the 2007 10b5 Plan for a
total purchase price of $200 million. Although 0.8 million shares remain authorized as of May 23,
2008, authorized funding for the 2007 10b5 Plan has been exhausted. The repurchase program may be
suspended or discontinued at any time.
In addition to the shares we repurchased under the two 10b5 Plans mentioned above, we acquired 0.3
million shares during fiscal 2008 outside the 10b5 Plans and an additional 16,000 shares for the
payment of withholding taxes related to the lapsing of restrictions on certain outstanding
restricted stock grants during the fiscal year ending March 31, 2008.
The Board of Directors declared quarterly cash dividends per share of $0.20 per quarter for fiscal
2008. 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 2008 were $29.5 million.
42
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
$5.9 million and $24.2 million of cash in fiscal 2008 and 2007, 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.
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.
Cash Provided by (Used in) Discontinued Operations
Cash provided by (used in) discontinued operations was approximately $8.5 million and ($121.8)
million for the year ended March 31, 2008 and 2007, respectively.
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 one standby letter of credit totaling $0.8 million outstanding under the Credit Agreement.
Accordingly, although there were no borrowings outstanding under the Credit Agreement at March 31,
2008, only $199 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.
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.
43
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, 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, $19.6 million
was available under this facility and no borrowings were outstanding at March 31, 2008.
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, 2008, 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.
On July 2, 2007 we acquired all of the outstanding shares of Perouse Plastie, SAS, including the
assumption of approximately €2.2 million in net debt and a capital lease obligation of
approximately €0.8 million.
44
Approximately €0.6 million of the debt was repaid in the fiscal year ended March 31, 2008,
leaving €1.6 million or approximately $2.5 million, of which $0.9 million is current and $1.6
million is long term. The debt consists primarily of installment loans with an average term of
5.94 years and a weighted average interest rate of 3.68%.
Of the capital lease obligations assumed, approximately €60 thousand was repaid in the fiscal
year ended March 31, 2008, leaving €0.8 million or approximately $1.2 million, of which $0.1
million is current and $1.1 million is long term. The lease obligations have a remaining term of
8.5 years and a weighted average interest rate of 5.9%.
A total of $218.8 million was available under all lines of credit at March 31, 2008, and
approximately $216.5 million was available under all lines of credit at March 31, 2007.
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 $28.916 and each
$1,000 principal amount will be convertible into 34.5832 shares of common stock. If the market
price of our stock falls below $28.916 per share as of the next “put” date, January 1, 2009, it is
likely that the bondholders will exercise their “put” option, requiring us to pay them cash for the
value of their bonds on that date.
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 $38.9251.
Contractual Obligations and Commitments
The following table summarizes our significant contractual obligations and other commitments at
March 31, 2008, 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 |
|
|
20,500 |
|
|
|
8,000 |
|
|
|
12,500 |
|
|
|
— |
|
|
|
— |
|
Operating lease obligations |
|
|
21,291 |
|
|
|
4,474 |
|
|
|
8,534 |
|
|
|
5,467 |
|
|
|
2,816 |
|
Purchase obligations |
|
|
20,414 |
|
|
|
20,414 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Interest on convertible notes |
|
|
3,094 |
|
|
|
3,094 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Loans payable |
|
|
2,555 |
|
|
|
935 |
|
|
|
1,296 |
|
|
|
229 |
|
|
|
95 |
|
Capital lease obligations |
|
|
1,224 |
|
|
|
144 |
|
|
|
275 |
|
|
|
295 |
|
|
|
510 |
|
Credit agreement (commitment fees) |
|
|
545 |
|
|
|
159 |
|
|
|
119 |
|
|
|
119 |
|
|
|
148 |
|
Unrecognized tax benefits(1) |
|
|
1,114 |
|
|
|
1,114 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
220,737 |
|
|
$ |
188,334 |
|
|
$ |
22,724 |
|
|
$ |
6,110 |
|
|
$ |
3,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
In addition to the current liabilities for unrecognized tax benefits (UTBs)
included in the table above, long-term liabilities for UTBs (net of federal tax benefits on
state taxes) and related accrued interest totaling approximately $6.6 million at March 31,
2008 are not included in the contractual commitments table because, due to their nature, there is a
high degree of uncertainty regarding the timing of future cash outflows and other events that
extinguish these liabilities. |
45
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, 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.
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. Approximately $1.0 million in variable rate
borrowings are outstanding at March 31, 2008. 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.
46
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. 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.
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, 2008, 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, 2008.
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, 2008 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, 2008. 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 its assessment, management believes that the Company
maintained effective internal control over financial reporting as of March 31, 2008 based on those
criteria.
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 an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting as of March 31, 2008.
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 Mentor Corporation’s internal control over financial reporting as of March 31,
2008, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Mentor
Corporation’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
included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
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, Mentor Corporation maintained, in all material respects, effective internal control
over financial reporting as of March 31, 2008, based on the COSO criteria.
We also have 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, 2008
and 2007, 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, 2008 and our report dated May
22, 2008 expressed an unqualified opinion thereon.
Los Angeles, California
May 22, 2008
49
ITEM 9B. OTHER INFORMATION.
On May 28, 2008, the Compensation Committee of the Board of Directors of the Company approved the
Company’s Fiscal 2009 Annual Incentive Bonus plan (the “AIB”), including minimum, target and
maximum level bonus objectives for the executive and non-executive officers. The amount of the
award of any cash bonuses under the AIB plan for fiscal year 2009 performance will be based on our
achievement of both specified results with respect to corporate earnings per share and
non-financial strategic initiatives for fiscal year 2009. If the minimum performance objectives are
met, participants will receive a bonus payment under the AIB plan. The amount that could be
received by our President and Chief Executive Officer under the AIB plan ranges from between 0%
(assuming the minimum objectives were not met) and 150% of base salary, with a target bonus amount
of 125% of base salary. For the other executive officers, the amount such officers could receive
under the AIB plan ranges from 0% to 90% of base salary, with target bonus amounts of 75% of base
salary.
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, 2008.
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, 2008.
|
|
|
| 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, 2008.
|
|
|
| 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, 2008.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
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, 2008.
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, 2008 and 2007 |
|
Consolidated Statements of Income for the Years Ended March 31, 2008, 2007 and 2006 |
|
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended March 31, 2008, 2007 and
2006 |
|
Consolidated Statements of Cash Flows for the Years Ended March 31, 2008, 2007 and 2006 |
|
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
The Board of Directors and Shareholders of Mentor Corporation
We have audited the accompanying consolidated balance sheets of Mentor Corporation as of March 31,
2008 and 2007, 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, 2008. 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, 2008 and 2007, and
the consolidated results of its operations and its cash flows for each of the three years in the
period ended March 31, 2008, 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), Mentor Corporation’s internal control over financial reporting as of
March 31, 2008, 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 22,
2008 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 Accounting
Standards No. 123 (R), “Share-Based Payments”.
Los Angeles, California
May 22, 2008
52
MENTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
| (in thousands, except share data) |
|
2008 |
|
|
2007 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
79,697 |
|
|
$ |
371,525 |
|
Marketable securities |
|
|
30,218 |
|
|
|
116,215 |
|
Accounts receivable, net of allowance for doubtful accounts
of $5,510 in 2008 and $4,534 in 2007 |
|
|
82,060 |
|
|
|
65,419 |
|
Inventories |
|
|
49,940 |
|
|
|
38,073 |
|
Deferred income taxes |
|
|
29,040 |
|
|
|
25,892 |
|
Prepaid income taxes |
|
|
8,074 |
|
|
|
13,495 |
|
Prepaid expenses and other |
|
|
11,233 |
|
|
|
6,761 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
290,262 |
|
|
|
637,380 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
58,252 |
|
|
|
34,683 |
|
Intangible assets, net |
|
|
36,336 |
|
|
|
15,963 |
|
Goodwill, net |
|
|
49,707 |
|
|
|
12,644 |
|
Other assets |
|
|
6,022 |
|
|
|
9,098 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
440,579 |
|
|
$ |
709,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders’ equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Account payable and accrued liabilities |
|
$ |
110,706 |
|
|
$ |
94,736 |
|
Dividends payable |
|
|
6,748 |
|
|
|
8,481 |
|
Short-term portion of long-term debt |
|
|
935 |
|
|
|
— |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
118,389 |
|
|
|
103,217 |
|
|
|
|
|
|
|
|
|
|
Long-term accrued liabilities |
|
|
27,536 |
|
|
|
21,683 |
|
Long-term debt |
|
|
1,620 |
|
|
|
— |
|
Convertible subordinated notes |
|
|
150,000 |
|
|
|
150,000 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
Common stock, $.10 par value: |
|
|
|
|
|
|
|
|
Authorized - 150,000,000 shares; issued and outstanding
33,739,203 shares in 2008;
42,400,483 shares in 2007; |
|
|
3,374 |
|
|
|
4,240 |
|
Preferred stock, $.01 par value |
|
|
|
|
|
|
|
|
Authorized - 25,000,000 shares in 2008, none
in 2007; none issued
and outstanding |
|
|
— |
|
|
|
— |
|
Accumulated other comprehensive income |
|
|
31,992 |
|
|
|
11,342 |
|
Retained earnings |
|
|
107,668 |
|
|
|
419,286 |
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
143,034 |
|
|
|
434,868 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
440,579 |
|
|
$ |
709,768 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
53
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, |
|
| (in thousands, except per share data) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Net sales |
|
$ |
373,208 |
|
|
$ |
301,974 |
|
|
$ |
268,272 |
|
Cost of sales |
|
|
98,995 |
|
|
|
78,656 |
|
|
|
69,209 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
274,213 |
|
|
|
223,318 |
|
|
|
199,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative |
|
|
150,158 |
|
|
|
120,080 |
|
|
|
100,962 |
|
Research and development |
|
|
44,984 |
|
|
|
35,021 |
|
|
|
29,036 |
|
Long-lived asset impairment charges |
|
|
— |
|
|
|
2,588 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
195,142 |
|
|
|
157,689 |
|
|
|
129,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income from continuing operations |
|
|
79,071 |
|
|
|
65,629 |
|
|
|
69,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(5,709 |
) |
|
|
(6,178 |
) |
|
|
(5,690 |
) |
Interest income |
|
|
8,034 |
|
|
|
22,489 |
|
|
|
4,124 |
|
Other (expense) income |
|
|
(3,072 |
) |
|
|
232 |
|
|
|
186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
78,324 |
|
|
|
82,172 |
|
|
|
67,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
23,373 |
|
|
|
24,548 |
|
|
|
19,606 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
54,951 |
|
|
|
57,624 |
|
|
|
48,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of income taxes |
|
|
(270 |
) |
|
|
1,551 |
|
|
|
14,278 |
|
Gain on sale of discontinued operations, net of income taxes |
|
|
8,734 |
|
|
|
231,439 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
63,415 |
|
|
$ |
290,614 |
|
|
$ |
62,357 |
|
|
|
|
|
|
|
|
|
|
|
| |
Basic earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
1.55 |
|
|
$ |
1.37 |
|
|
$ |
1.12 |
|
Discontinued operations |
|
$ |
0.24 |
|
|
$ |
5.55 |
|
|
$ |
0.33 |
|
Basic earnings per share |
|
$ |
1.79 |
|
|
$ |
6.93 |
|
|
$ |
1.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
1.40 |
|
|
$ |
1.24 |
|
|
$ |
1.01 |
|
Discontinued operations |
|
$ |
0.20 |
|
|
$ |
4.75 |
|
|
$ |
0.28 |
|
Diluted earnings per share |
|
$ |
1.61 |
|
|
$ |
5.99 |
|
|
$ |
1.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
0.80 |
|
|
$ |
0.74 |
|
|
$ |
0.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
35,375 |
|
|
|
41,960 |
|
|
|
42,995 |
|
Diluted |
|
|
41,449 |
|
|
|
49,092 |
|
|
|
50,870 |
|
See notes to consolidated financial statements.
54
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
| |
|
Common |
|
|
Common |
|
|
Capital in |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
| |
|
Shares |
|
|
Stock $.10 |
|
|
Excess of |
|
|
Deferred |
|
|
Comprehensive |
|
|
Retained |
|
|
|
|
| (in thousands, except per share data) |
|
Outstanding |
|
|
Par Value |
|
|
Par Value |
|
|
Compensation |
|
|
Income |
|
|
Earnings |
|
|
Total |
|
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 |
|
|
|
|
|
|
|
| |
|
Shares |
|
|
Stock $.10 |
|
|
Excess of |
|
|
Deferred |
|
|
Comprehensive |
|
|
Retained |
|
|
|
|
| (in thousands, 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 123(R) |
|
|
— |
|
|
|
— |
|
|
|
(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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
63,415 |
|
|
|
63,415 |
|
Foreign currency
translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
20,443 |
|
|
|
— |
|
|
|
20,443 |
|
Change in unrealized gain
(loss) on investments and
unrecognized actuarial gains |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
207 |
|
|
|
— |
|
|
|
207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
84,065 |
|
Exercise of stock options, net |
|
|
314 |
|
|
|
32 |
|
|
|
5,776 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,808 |
|
Income tax benefit from the
exercise of stock options |
|
|
— |
|
|
|
— |
|
|
|
3,488 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,488 |
|
Issuance of restricted stock |
|
|
52 |
|
|
|
5 |
|
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Forfeiture of restricted stock |
|
|
(30 |
) |
|
|
(3 |
) |
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Issuance of stock under
ESPP |
|
|
3 |
|
|
|
— |
|
|
|
99 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
99 |
|
Repurchase of common
stock |
|
|
(9,000 |
) |
|
|
(900 |
) |
|
|
(20,244 |
) |
|
|
— |
|
|
|
— |
|
|
|
(347,239 |
) |
|
|
(368,383 |
) |
Stock based compensation
expense |
|
|
— |
|
|
|
— |
|
|
|
10,883 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10,883 |
|
Dividends declared
($.80 per share) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(27,794 |
) |
|
|
(27,794 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2008 |
|
|
33,739 |
|
|
$ |
3,374 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
31,992 |
|
|
$ |
107,668 |
|
|
$ |
143,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
56
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, |
|
| (in thousands) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Net income |
|
$ |
63,415 |
|
|
$ |
290,614 |
|
|
$ |
62,357 |
|
Less: (income) loss from discontinued operations, net of income taxes |
|
|
270 |
|
|
|
(1,551 |
) |
|
|
(14,278 |
) |
Less: (gain) on sale of discontinued operations, net of income taxes |
|
|
(8,734 |
) |
|
|
(231,439 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
54,951 |
|
|
$ |
57,624 |
|
|
$ |
48,079 |
|
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to derive cash flows from continuing operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
8,389 |
|
|
|
7,198 |
|
|
|
7,748 |
|
Amortization |
|
|
5,225 |
|
|
|
2,495 |
|
|
|
2,274 |
|
Deferred income taxes |
|
|
(2,800 |
) |
|
|
4,889 |
|
|
|
793 |
|
Non-cash compensation |
|
|
10,883 |
|
|
|
10,950 |
|
|
|
1,471 |
|
Tax benefit from exercise of stock options |
|
|
3,488 |
|
|
|
11,870 |
|
|
|
26,267 |
|
Excess tax benefits from equity compensation |
|
|
(2,285 |
) |
|
|
(8,643 |
) |
|
|
— |
|
Non-cash impairment of long-lived assets |
|
|
— |
|
|
|
2,588 |
|
|
|
— |
|
Loss on sale of assets |
|
|
149 |
|
|
|
304 |
|
|
|
303 |
|
Loss (gain) on long-term marketable securities and unrecognized actuarial
gains, net |
|
|
207 |
|
|
|
(91 |
) |
|
|
121 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(9,334 |
) |
|
|
(7,576 |
) |
|
|
(2,136 |
) |
Inventories |
|
|
2,348 |
|
|
|
(2,658 |
) |
|
|
(2,293 |
) |
Other current assets |
|
|
(1,749 |
) |
|
|
(17,228 |
) |
|
|
(2,109 |
) |
Accounts payable and accrued liabilities |
|
|
16,040 |
|
|
|
9,063 |
|
|
|
19,618 |
|
Income taxes payable |
|
|
— |
|
|
|
(1,837 |
) |
|
|
(1,092 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operating activities |
|
|
85,512 |
|
|
|
68,948 |
|
|
|
99,044 |
|
Net cash provided by (used in) discontinued operating activities |
|
|
8,464 |
|
|
|
(121,672 |
) |
|
|
25,354 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
93,976 |
|
|
|
(52,724 |
) |
|
|
124,398 |
|
Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(23,381 |
) |
|
|
(5,737 |
) |
|
|
(8,531 |
) |
Purchases of intangibles |
|
|
(4,313 |
) |
|
|
(6,741 |
) |
|
|
(1,543 |
) |
Purchases of marketable securities |
|
|
(45,943 |
) |
|
|
(77,999 |
) |
|
|
(295,439 |
) |
Sales of marketable securities |
|
|
131,117 |
|
|
|
64,396 |
|
|
|
229,461 |
|
Proceeds from the sale of the Urology Business |
|
|
— |
|
|
|
455,348 |
|
|
|
— |
|
Purchase of
business, net of cash acquired |
|
|
(53,460 |
) |
|
|
— |
|
|
|
— |
|
Other, net |
|
|
34 |
|
|
|
429 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) continuing investing activities |
|
|
4,054 |
|
|
|
429,696 |
|
|
|
(76,052 |
) |
Net cash used in discontinued investing activities |
|
|
— |
|
|
|
(50 |
) |
|
|
(5,164 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
4,054 |
|
|
|
429,646 |
|
|
|
(81,216 |
) |
Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock |
|
|
(368,383 |
) |
|
|
(93,025 |
) |
|
|
(42,837 |
) |
Proceeds from exercise of stock options and ESPP |
|
|
5,907 |
|
|
|
24,207 |
|
|
|
43,649 |
|
Excess tax benefits from equity compensation |
|
|
2,285 |
|
|
|
8,643 |
|
|
|
— |
|
Dividends paid |
|
|
(29,526 |
) |
|
|
(30,478 |
) |
|
|
(29,964 |
) |
Borrowings under line of credit agreements |
|
|
— |
|
|
|
— |
|
|
|
14,000 |
|
Repayments of debt |
|
|
(604 |
) |
|
|
(14,000 |
) |
|
|
(970 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in continuing financing activities |
|
|
(390,321 |
) |
|
|
(104,653 |
) |
|
|
(16,122 |
) |
Net cash used in discontinued financing activities |
|
|
— |
|
|
|
— |
|
|
|
(2,213 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(390,321 |
) |
|
|
(104,653 |
) |
|
|
(18,335 |
) |
Effect of currency exchange rates on cash and cash equivalents |
|
|
463 |
|
|
|
663 |
|
|
|
(780 |
) |
Effect of currency exchange rates of discontinued operations |
|
|
— |
|
|
|
(120 |
) |
|
|
(2,020 |
) |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(291,828 |
) |
|
|
272,812 |
|
|
|
22,047 |
|
Cash and cash equivalents at beginning of year |
|
|
371,525 |
|
|
|
98,713 |
|
|
|
76,666 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
79,697 |
|
|
$ |
371,525 |
|
|
$ |
98,713 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes for continuing operations |
|
$ |
11,778 |
|
|
$ |
19,927 |
|
|
$ |
4,601 |
|
Interest for continuing operations |
|
$ |
4,606 |
|
|
$ |
4,822 |
|
|
$ |
4,522 |
|
See notes to consolidated financial statements.
57
MENTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
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. Presently, the Company develops,
manufactures, licenses and markets a range of products serving the aesthetic and general surgery
markets, including plastic and reconstructive surgery.
Historically, the Company’s products were categorized into three primary segments:
| |
• |
|
Aesthetic and General Surgery — This segment includes 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. |
| |
| |
• |
|
Surgical Urology — This segment includes surgically implantable prostheses for
the treatment of impotence, surgically implantable incontinence products, urinary care
products, and brachytherapy seeds for the treatment of prostate cancer. |
| |
| |
• |
|
Clinical and Consumer Healthcare — This segment includes catheters and other
products for the management of urinary incontinence and retention. |
On June 2, 2006, the Company completed a transaction for the sale of the Surgical Urology and the
Clinical and Consumer Healthcare segments (together referred to as the Urology Business) to
Coloplast A/S (“Coloplast”). Please see Note T to the consolidated financial statements for
further information. The Company currently operates one business segment — aesthetic products.
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, 2007 balance sheet includes a $9.5 million
reclassification from current liabilities to long-term accrued liabilities for the long term
portion of deferred revenue.
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.” Available-for-sale securities
are reported at fair market value. 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. Unrealized gains and losses are excluded from income, and 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
Cash and available-for-sale investments at March 31, 2008 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
| |
|
Adjusted |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
| (in thousands) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Cash balances |
|
$ |
71,756 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
71,756 |
|
Money market funds |
|
|
7,941 |
|
|
|
— |
|
|
|
— |
|
|
|
7,941 |
|
U.S. Government and Agency |
|
|
15,336 |
|
|
|
16 |
|
|
|
— |
|
|
|
15,352 |
|
State and Municipal Agency obligations |
|
|
14,582 |
|
|
|
3 |
|
|
|
— |
|
|
|
14,585 |
|
Corporate debt |
|
|
281 |
|
|
|
— |
|
|
|
— |
|
|
|
281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale investments |
|
$ |
109,896 |
|
|
$ |
19 |
|
|
$ |
— |
|
|
$ |
109,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in cash and cash equivalents |
|
$ |
79,697 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
79,697 |
|
Included in current marketable securities |
|
|
30,199 |
|
|
|
19 |
|
|
|
— |
|
|
|
30,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale investments |
|
$ |
109,896 |
|
|
$ |
19 |
|
|
$ |
— |
|
|
$ |
109,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our debt securities include U.S. Government and Agency obligations and corporate debt with
maturities within one year and highly liquid variable rate State and Municipal Agency obligations
with maturities greater than 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. The carrying value of the debt acquired
in the Perouse acquisition and of the convertible subordinated notes approximates fair value.
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 2008.
59
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.
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 a sale of 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. In the case of inventory acquired in an acquisition, inventory is valued at fair
value. 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
assets 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, trade names and
other intangibles. These are stated at cost less accumulated amortization and, when applicable, 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 and free
product replacement. 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, the Company 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 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 and retention
levels. 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;
or in the case of products related to discontinued operations, including urology products or
ophthalmic products, cost are recorded in discontinued operations. 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 or
discontinued operations, 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, 2008, these plans have instruments outstanding that might
require the issuance of 4.9 million shares of common stock to its employees and directors.
Stock-based awards under the Company’s employee compensation plans are made with authorized but
unissued shares reserved for this purpose.
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).
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.
Advertising Expenses
The Company expenses media advertising costs as incurred or where applicable, upon first showing.
Advertising expenses were $3.1 million, $1.8 million and $3.0 million in fiscal 2008, 2007 and
2006, respectively. There were no capitalized advertising costs at March 31, 2008 and 2007.
Foreign Operations
Export sales to independent distributors were $9.0 million, $6.8 million and $7.2 million in fiscal
2008, 2007 and 2006, respectively. In addition, $107.0 million, $77.3 million, and $68.3 million
of net sales from continuing operations in fiscal 2008, 2007 and 2006, 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 Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair
Value Measurements.” This statement defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles (“GAAP”), 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 will adopt SFAS No. 157 in the first
quarter of fiscal 2009, and it is not expected to have a material impact on the Company’s results
of operations or financial position.
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” (“SFAS 159”). SFAS 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. SFAS 159 was effective
April 1, 2008. The Company did not elect the fair value option for any of its eligible financial
instruments and other items.
In June 2007, FASB ratified Emerging Issues Task Force Issue No. 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and
Development Activities” (“EITF No. 07-3”). EITF No. 07-3 requires that nonrefundable advance
payments for goods and services that will be used or rendered in future research and development
activities pursuant to executory contractual arrangements should be
deferred and recognized as an expense in the period that the related goods are delivered or
services are performed. The Company will adopt EITF No. 07-3 in the first quarter of fiscal 2009,
and it is not expected to have a material impact on the Company’s results of operations or
financial position.
62
In December 2007, FASB ratified Emerging Issues Task Force Issue No. 07-1, “Accounting for
Collaborative Arrangements”. EITF No. 07-1 requires a company in a collaborative arrangement to
present the results of activities for which it acts as the principal on a gross basis and to report
any payments received from (made to) other collaborators based on other applicable GAAP or, in the absence of other applicable GAAP, based on analogy
to authoritative literature or a reasonable, rational, and consistently applied accounting policy
election. The Company is required to adopt EITF No. 07-1 for annual periods beginning after
December 15, 2008. The Company is currently evaluating the requirements of EITF No. 07-1 and it is
not expected to have a material impact on the Company’s consolidated financial statements.
In December 2007, FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”) and SFAS
No. 160, “Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements
— an amendment of ARB No. 51” (“SFAS 160”). These standards will significantly change the
accounting and reporting for business combination transactions and noncontrolling (minority)
interests in consolidated financial statements, including capitalizing at the acquisition date the
fair value of acquired in-process research and development (IPR&D), and remeasuring and writing
down these assets, if necessary, in subsequent periods during their development. These new
standards will be applied prospectively for business combinations that occur on or after January 1,
2009, except that presentation and disclosure requirements of SFAS 160 regarding noncontrolling
interests shall be applied retrospectively.
Use of Estimates
Financial statements prepared in accordance with accounting principles generally accepted in the
United States require management 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. Actual results may differ from these estimates under different assumptions or conditions.
Note B — Inventories
Inventories at March 31 consisted of:
| |
|
|
|
|
|
|
|
|
| (in thousands) |
|
2008 |
|
|
2007 |
|
Raw materials |
|
$ |
7,327 |
|
|
$ |
5,924 |
|
Work in process |
|
|
6,950 |
|
|
|
4,961 |
|
Finished goods on consignment |
|
|
18,058 |
|
|
|
13,402 |
|
Finished goods |
|
|
17,605 |
|
|
|
13,786 |
|
|
|
|
|
|
|
|
|
|
$ |
49,940 |
|
|
$ |
38,073 |
|
|
|
|
|
|
|
|
Note C — Property and Equipment
Property and equipment at March 31 consisted of:
| |
|
|
|
|
|
|
|
|
| (in thousands) |
|
2008 |
|
|
2007 |
|
Land |
|
$ |
276 |
|
|
$ |
55 |
|
Buildings |
|
|
13,909 |
|
|
|
10,853 |
|
Leasehold improvements |
|
|
23,747 |
|
|
|
23,099 |
|
Furniture, fixtures and equipment |
|
|
70,832 |
|
|
|
59,708 |
|
Construction in progress |
|
|
20,657 |
|
|
|
4,217 |
|
|
|
|
|
|
|
|
|
|
|
129,421 |
|
|
|
97,932 |
|
Less accumulated depreciation and amortization |
|
|
(71,169 |
) |
|
|
(63,249 |
) |
|
|
|
|
|
|
|
|
|
$ |
58,252 |
|
|
$ |
34,683 |
|
|
|
|
|
|
|
|
63
Note D — Other Comprehensive Income
Other comprehensive income includes the net change in unrealized gains (losses) on
available-for-sale securities and unrecognized actuarial gains as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, |
|
| (in thousands) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Unrealized gains (losses) and unrecognized actuarial
gains arising during period, net of taxes of $6, $0
and $217, respectively |
|
$ |
239 |
|
|
$ |
32 |
|
|
$ |
(403 |
) |
Reclassification adjustments for gains (losses)
realized in net income, net of taxes of $0,
$27 and $282, respectively |
|
|
(32 |
) |
|
|
59 |
|
|
|
524 |
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized/unrecognized gains |
|
$ |
207 |
|
|
$ |
91 |
|
|
$ |
121 |
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income which is included in the Company’s shareholders’ equity at
March 31 consisted of:
| |
|
|
|
|
|
|
|
|
| (in thousands) |
|
2008 |
|
|
2007 |
|
Net unrealized/unrecognized gains |
|
$ |
239 |
|
|
$ |
32 |
|
Foreign currency translation adjustments |
|
|
31,753 |
|
|
|
11,310 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
31,992 |
|
|
$ |
11,342 |
|
|
|
|
|
|
|
|
Note E — Accounts Payable and Accrued Liabilities and Long-Term Accrued Liabilities
Accounts payable and accrued liabilities at March 31 consisted of:
| |
|
|
|
|
|
|
|
|
| (in thousands) |
|
2008 |
|
|
2007 |
|
Trade accounts payable |
|
$ |
43,209 |
|
|
$ |
32,147 |
|
Accrued compensation |
|
|
22,026 |
|
|
|
14,022 |
|
Sales returns |
|
|
17,344 |
|
|
|
18,590 |
|
Product liability reserve |
|
|
6,945 |
|
|
|
6,555 |
|
Deferred revenue |
|
|
2,693 |
|
|
|
2,349 |
|
Warranty reserves |
|
|
2,534 |
|
|
|
2,989 |
|
Other |
|
|
15,955 |
|
|
|
18,084 |
|
|
|
|
|
|
|
|
|
|
$ |
110,706 |
|
|
$ |
94,736 |
|
|
|
|
|
|
|
|
Long-term accrued liabilities at March 31 consisted of:
| |
|
|
|
|
|
|
|
|
| (in thousands) |
|
2008 |
|
|
2007 |
|
Warranty reserves |
|
$ |
9,410 |
|
|
$ |
11,319 |
|
Deferred revenue |
|
|
9,663 |
|
|
|
9,514 |
|
Long-term capital lease obligations |
|
|
1,080 |
|
|
|
— |
|
Other |
|
|
7,383 |
|
|
|
850 |
|
|
|
|
|
|
|
|
|
|
$ |
27,536 |
|
|
$ |
21,683 |
|
|
|
|
|
|
|
|
64
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 released urology
subsidiaries as guarantors, released the pledges of the capital stock of urology subsidiaries,
modified the minimum EBITDA, modified 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 one
standby letter of credit totaling $0.8 million outstanding which is secured by the Credit
Agreement. Accordingly, although there were no borrowings outstanding under the Credit Agreement
at March 31, 2008, only $199 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.
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, 2008, all covenants and restrictions had been satisfied, and
there were no borrowings outstanding under the Credit Agreement.
65
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, 2008, there was no outstanding balance
under this credit facility, and accordingly, $19.6 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, 2008, 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, 2008, there were short-term and long-term borrowings outstanding of approximately $0.9
million and $1.6 million, respectively. Of the $1.6 million of long-term borrowings, $0.9 million
matures in fiscal 2010 and $0.7 million thereafter. A total of $218.8 million and $216.5 million
was available under all lines of credit at March 31, 2008 and 2007, respectively.
Note G — Stock Options, Restricted Stock and Employee Stock Purchase Plan
Employee Stock Purchase Plan
In September 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 U.S. based
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.
66
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, 2008, approximately 5,000 shares have been
sold under the plan.
The Company’s Long-Term Incentive Plans
The Company has two plans under which equity awards have been issued, the 1991 Plan and the Amended
2000 Long-Term Incentive Plan. The latter was amended and restated by shareholder approval in
September 2005 and is now referred to as the Mentor Corporation 2005 Long-Term Incentive Plan, and
was further amended in November 2005 and September 2006 (as amended, the “2005 Plan”). These
amendments resulted in an increase in the number of shares of the Company’s common stock available
for award under the plan by 1,600,000 shares with the new aggregate share limit for the 2005 Plan
at 7,600,000 shares.
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.
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 August 9, 2007 the Board of Directors (the “Board”) of Mentor Corporation approved the 2007
Strategic Equity Incentive Plan (the “Sub-Plan”) under the 2005 Plan. The Board’s objective in
establishing the Sub-Plan was to create a long-term incentive plan for the Company’s top 40
executives and senior managers, including the Company’s executive officers, designed to reward the
participants for achieving superior financial results for the Company over a period of
approximately four fiscal years.
The Sub-Plan provides for the grants of non-qualified stock options to key employees of the
Company. The exercise price for the shares subject to the options was set at a premium to the
closing trading price of the Company’s common stock as reported by the New York Stock Exchange on
the date of grant. The shares subject to the options will vest subject to the attainment of
specified earnings per share (“EPS”) targets over the second half of fiscal 2008 and the full
fiscal years 2009, 2010 and 2011. The vesting percentages are disproportionately skewed to the
achievement of the EPS targets in fiscal years 2010 and 2011, and the EPS targets represent
compounded growth rates that are in excess of recent EPS growth rates for the Company.
Restricted Stock
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.
Stock compensation expense is recognized over the 5-year vesting period of the restricted stock
grants. As of March 31, 2008 there was $6.1 million of total unrecognized compensation expense
related to nonvested shares. That expense is expected to be recognized over a weighted-average
period of 3.5 years. The Company recognizes total compensation cost on a straight-line basis over
the service period of each vesting tranche.
The total fair value of shares vested during the years ended March 31, 2008 and 2007 was $3.5
million and $2.7 million, respectively. Because no shares vested during the year ending March 31,
2006, the total fair value of shares vested was $0.
67
The fair value of shares of restricted stock is 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, 2008 is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted-average |
|
| (in thousands, except per share amounts) |
|
Shares |
|
|
grant date fair value |
|
Nonvested at March 31, 2007 |
|
|
346 |
|
|
$ |
47.71 |
|
Granted |
|
|
51 |
|
|
|
40.65 |
|
Lapsed |
|
|
(80 |
) |
|
|
48.37 |
|
Forfeited |
|
|
(30 |
) |
|
|
50.02 |
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2008 |
|
|
287 |
|
|
$ |
46.03 |
|
|
|
|
|
|
|
|
|
Options
The Company has granted options to key employees and non-employee directors under its 2005 Plan and
1991 Plan. With the exception of options issued under the Sub-Plan described above, options
granted under both plans are generally 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.
Options issued under the Sub-Plan are exercisable, subject to the attainment of EPS targets,
disproportionately over forty-two months and expire seven years from the date of grant. They were
issued with an exercise price at a premium to the fair market value on the date of grant. Activity
in the stock option plans during fiscal 2008, 2007 and 2006 was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
| |
|
|
|
|
|
Weighted- |
|
|
average |
|
|
|
|
| |
|
|
|
|
|
average |
|
|
remaining |
|
|
Aggregate |
|
| |
|
|
|
|
|
exercise |
|
|
contractual |
|
|
intrinsic |
|
| (in thousands, except per share amounts and years) |
|
Options |
|
|
price |
|
|
life (Yrs) |
|
|
value |
|
Balance March 31, 2005 |
|
|
6,165 |
|
|
$ |
16.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
893 |
|
|
|
37.49 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(3,162 |
) |
|
|
13.79 |
|
|
|
|
|
|
$ |
79,379 |
|
Canceled or expired |
|
|
(214 |
) |
|
|
22.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2006 |
|
|
3,682 |
|
|
|
24.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
280 |
|
|
|
46.39 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,277 |
) |
|
|
18.89 |
|
|
|
|
|
|
$ |
36,865 |
|
Canceled or expired |
|
|
(424 |
) |
|
|
32.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2007 |
|
|
2,261 |
|
|
|
28.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
2,847 |
|
|
|
47.80 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(328 |
) |
|
|
19.69 |
|
|
|
|
|
|
$ |
8,041 |
|
Canceled or expired |
|
|
(142 |
) |
|
|
42.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2008 |
|
|
4,638 |
|
|
$ |
40.39 |
|
|
|
6.63 |
|
|
$ |
7,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and Expected to Vest at March 31, 2008 |
|
|
4,315 |
|
|
$ |
39.94 |
|
|
|
6.55 |
|
|
$ |
7,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2008 |
|
|
1,305 |
|
|
$ |
24.81 |
|
|
|
5.16 |
|
|
$ |
7,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008 there was $33.1 million of total unrecognized compensation expense related to
stock options. That expense is expected to be recognized over a weighted-average period of 2.9
years. The Company recognizes total compensation cost on a straight-line basis over the service
period of each vesting tranche.
68
At March 31, 2008, the 2005 Plan had options for 4.4 million shares granted and outstanding, and
0.2 million shares available for grant. The 1991 Plan had options for 0.2 million shares granted
and outstanding at March 31, 2008. No additional options can be granted under the 1991 Plan.
Information regarding stock options outstanding at March 31, 2008 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 $22.00 |
|
|
732,501 |
|
|
|
3.84 |
|
|
$ |
16.09 |
|
|
|
732,501 |
|
|
$ |
16.09 |
|
$22.01-$38.00 |
|
|
1,061,025 |
|
|
|
7.17 |
|
|
$ |
35.33 |
|
|
|
495,578 |
|
|
$ |
34.40 |
|
$38.01-$48.00 |
|
|
779,420 |
|
|
|
8.57 |
|
|
$ |
43.30 |
|
|
|
45,750 |
|
|
$ |
41.62 |
|
$48.01-$53.76 |
|
|
2,065,000 |
|
|
|
6.62 |
|
|
$ |
50.52 |
|
|
|
31,250 |
|
|
$ |
52.68 |
|
At March 31, 2008, 2007 and 2006, stock options to purchase 1.3 million, 1.2 million and 1.7
million shares, respectively, were exercisable at weighted-average exercise prices of $24.81,
$20.19 and $15.96 per share, respectively.
The weighted-average fair values of stock options granted were $12.02, $15.63 and $10.60 per share
for the fiscal years ended March 31, 2008, 2007 and 2006, 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, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Risk-free interest rate |
|
|
4.18 |
% |
|
|
4.91 |
% |
|
|
3.93 |
% |
Expected life (in years) |
|
|
4.97 |
|
|
|
4.77 |
|
|
|
4.93 |
|
Expected volatility |
|
|
0.34 |
|
|
|
0.36 |
|
|
|
0.32 |
|
Expected dividend yield |
|
|
1.914 |
% |
|
|
1.503 |
% |
|
|
2.047 |
% |
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, 2008. The fair value of the PSUs at the date of grant is being amortized as compensation
expense over the performance period. The fair value of the PSUs at the date of grant was
determined using a Monte Carlo Simulation Model.
69
Information regarding our Performance Stock Units during the fiscal year ended March 31, 2008 is as
follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Fair market |
|
| |
|
|
|
|
|
value at date |
|
| (in thousands) |
|
Shares |
|
|
of grant |
|
Nonvested at March 31, 2007 |
|
|
307 |
|
|
$ |
6,520 |
|
Forfeited |
|
|
(5 |
) |
|
|
(109 |
) |
|
|
|
|
|
|
|
Nonvested at March 31, 2008 |
|
|
302 |
|
|
$ |
6,411 |
|
|
|
|
|
|
|
|
As of March 31, 2008 there was $2.2 million of total unrecognized compensation expense related to
nonvested shares. That expense is expected to be recognized over a weighted-average period of 1.0
year. The Company recognizes total compensation cost on a straight-line basis over the service
period of each vesting tranche. Because no shares vested during the years ended March 31, 2008,
2007 and 2006 the total fair value of shares vested was $0.
Compensation Expense
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, 2008, 2007 and
2006, respectively:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Twelve Months Ended March 31, |
|
| (in thousands) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Stock options |
|
$ |
4,367 |
|
|
$ |
4,425 |
|
|
$ |
— |
|
Restricted stock |
|
|
4,361 |
|
|
|
4,879 |
|
|
|
1,471 |
|
Performance units |
|
|
2,155 |
|
|
|
1,646 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense, pre-tax |
|
|
10,883 |
|
|
|
10,950 |
|
|
|
1,471 |
|
Tax benefit from stock-based compensation expense |
|
|
(3,371 |
) |
|
|
(3,349 |
) |
|
|
(544 |
) |
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense, net of tax |
|
$ |
7,512 |
|
|
$ |
7,601 |
|
|
$ |
927 |
|
|
|
|
|
|
|
|
|
|
|
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, 2008 and 2007 was minor. The above table does not reflect compensation expense related to
stock option grants in fiscal 2006 since the Company did not record stock option expense pursuant
to APB No. 25, as discussed below.
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 |
|
Net income from continuing operations: as reported |
|
$ |
48,079 |
|
Deduct: compensation expense fair value method |
|
|
(3,900 |
) |
|
|
|
|
Net income: pro forma |
|
$ |
44,179 |
|
|
|
|
|
|
Basic earnings per share from continuing operations: as reported |
|
$ |
1.12 |
|
Basic earnings per share from continuing operations: pro forma |
|
$ |
1.02 |
|
|
|
|
|
|
Net income from continuing operations: as reported |
|
$ |
48,079 |
|
Add back after tax interest expense on convertible notes |
|
|
3,208 |
|
|
|
|
|
Net income: diluted earnings per share |
|
|
51,287 |
|
Deduct: compensation expense fair value method |
|
|
(3,900 |
) |
|
|
|
|
Net income: diluted earnings per share pro forma |
|
$ |
47,387 |
|
|
|
|
|
|
Diluted earnings per share from continuing operations: as reported |
|
$ |
1.01 |
|
Diluted earnings per share from continuing operations: pro forma |
|
$ |
0.93 |
|
70
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 the Company’s financial statements.
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
No. 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 above 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.
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
fiscal 2006 have not been adjusted to reflect the adoption of SFAS 123(R).
Note H — Income Taxes
The provision for income taxes includes the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, |
|
| (in thousands) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
24,232 |
|
|
$ |
22,281 |
|
|
$ |
17,436 |
|
State |
|
|
2,368 |
|
|
|
3,379 |
|
|
|
519 |
|
Foreign |
|
|
796 |
|
|
|
2,177 |
|
|
|
1,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,396 |
|
|
|
27,837 |
|
|
|
19,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(2,414 |
) |
|
|
(2,617 |
) |
|
|
637 |
|
State |
|
|
(836 |
) |
|
|
(246 |
) |
|
|
339 |
|
Foreign |
|
|
(773 |
) |
|
|
(426 |
) |
|
|
(985 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,023 |
) |
|
|
(3,289 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23,373 |
|
|
$ |
24,548 |
|
|
$ |
19,606 |
|
|
|
|
|
|
|
|
|
|
|
71
Deferred income taxes reflect the temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company’s net deferred tax assets at March 31 are as follows:
| |
|
|
|
|
|
|
|
|
| (in thousands) |
|
2008 |
|
|
2007 |
|
Deferred tax liabilities |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Book liabilities not deductible for tax |
|
$ |
22,144 |
|
|
$ |
25,192 |
|
Expenses capitalized for tax |
|
|
474 |
|
|
|
471 |
|
Intercompany inventory-related items |
|
|
5,658 |
|
|
|
3,733 |
|
Fixed assets |
|
|
2,282 |
|
|
|
1,654 |
|
Convertible note hedge |
|
|
1,610 |
|
|
|
3,918 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
$ |
32,168 |
|
|
$ |
34,968 |
|
|
|
|
|
|
|
|
Net deferred
tax assets |
|
$ |
32,168 |
|
|
$ |
34,968 |
|
|
|
|
|
|
|
|
The change in the net deferred tax asset differs from the deferred tax provision as a result of
deferred tax assets that do not typically impact the provision. This includes the benefit related
to tax deductions from the exercise of non-qualified stock options in excess of compensation-cost
recognized for financial statement reporting purposes which is recorded as an increase to
additional paid-in-capital when realized.
Effective April 1, 2007, the Company adopted FASB Interpretation No. (“FIN”) 48, “Accounting for
Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
clarifies the accounting for uncertainty in income taxes by prescribing rules for recognition,
measurement and classification in our consolidated financial statements of tax positions taken or
expected to be taken in a tax return. For tax benefits to be recognized under FIN 48, a tax
position must be more-likely-than-not to be sustained upon examination by taxing authorities. The
amount recognized is measured as the largest amount of benefit that is greater than 50% likely of
being realized upon settlement. There was no cumulative effect of applying the recognition
measurement provisions upon adoption of FIN 48.
FIN 48 also provides guidance on the balance sheet classification of liabilities for unrecognized
tax benefits (“UTBs”) as either current or non-current depending on the expected timing of
payments. Upon adoption of FIN 48, the Company reclassified approximately $1.4 million and $3.5
million of UTBs and related accrued interest from income taxes payable to current and non-current
liabilities, respectively.
The reconciliation of the total gross amounts of UTBs for the year ended March 31, 2008 is as
follows (in thousands):
| |
|
|
|
|
Balance at April 1, 2007 |
|
$ |
4,304 |
|
Additions based on tax positions related to the current year |
|
|
1,757 |
|
Additions for tax positions of prior years |
|
|
2,619 |
|
Reductions for tax positions of prior years |
|
|
(448 |
) |
Settlements |
|
|
(185 |
) |
Statute lapses |
|
|
(54 |
) |
|
|
|
|
Balance at March 31, 2008 |
|
$ |
7,993 |
|
|
|
|
|
The majority of UTBs, if recognized, would affect our effective tax rate.
As of March 31, 2008, the Company believes that it was reasonably possible that our liabilities for
UTBs may decrease by $0.9 million to $1.7 million within the succeeding twelve months due to
potential tax settlements as well as resolution of other issues identified during the examination
process.
Interest and penalties related to UTBs are classified as a component of our provision for income
taxes. During fiscal 2008, the Company recognized approximately $0.2 million of interest benefit
through the income tax
provision in the Consolidated Statement of Income. At March 31, 2008, there was approximately $0.5
million of accrued interest associated with UTBs.
72
The reconciliation of the federal statutory rate to the Company’s effective rate is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Federal statutory rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Increase (decrease) resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
State taxes net of federal tax benefit |
|
|
1.6 |
|
|
|
1.4 |
|
|
|
1.6 |
|
Non-taxable interest and dividends |
|
|
(0.6 |
) |
|
|
(1.4 |
) |
|
|
(0.4 |
) |
Research and development credit |
|
|
(1.6 |
) |
|
|
(1.9 |
) |
|
|
(1.7 |
) |
ETI/MFG deduction |
|
|
(0.8 |
) |
|
|
(0.4 |
) |
|
|
(1.1 |
) |
Foreign operations |
|
|
(4.3 |
) |
|
|
(4.9 |
) |
|
|
(7.3 |
) |
Dividend repatriation |
|
|
— |
|
|
|
— |
|
|
|
2.5 |
|
Equity compensation |
|
|
0.5 |
|
|
|
0.8 |
|
|
|
— |
|
Other |
|
|
— |
|
|
|
1.3 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29.8 |
% |
|
|
29.9 |
% |
|
|
29.0 |
% |
|
|
|
|
|
|
|
|
|
|
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, 2008, these foreign earnings amounted to approximately $60.1 million. If repatriated,
additional taxes of approximately $22.0 million on these earnings would be due, based on the
current tax rates in effect. For the years ended March 31, 2008, 2007, and 2006, foreign income
before taxes were $17.6 million, $20.4 million and $19.3 million, respectively.
One or more of our legal entities file income tax returns in the U.S. federal jurisdiction, various
U.S. state jurisdictions and certain foreign jurisdictions. Our income tax returns are routinely
audited by the tax authorities in those jurisdictions. Significant disputes may arise with these
tax authorities involving issues of the timing and amount of deductions, the use of credits, and
allocations of income among various tax jurisdictions because of differing interpretations of tax
laws and regulations. The Company is no longer subject to U.S. federal income tax examinations for
tax years ending on or before March 31, 2004 or to California state income tax examinations for tax
years ending on or before March 31, 2003.
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. 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 2008. 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 are being amortized over three years for one of
the $3 million milestones and ten years for the other. As of March 31, 2008, an additional $4.3
million milestone was met and is also included in other intangibles and will be amortized over five
years. The lives over which the milestone payments are being
amortized are based on the term of the commercialization agreement for the non-refundable upfront
payment, or the expected product life cycle of each underlying product in each region for the
remaining milestones.
In July 2007, the Company acquired Perouse Plastie SAS resulting in the addition of $18.4 million
in intangibles and $31.8 million in goodwill. For further information related to this acquisition,
see Note J — Acquisitions.
73
Intangible assets at March 31 consisted of:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, 2008 |
|
| |
|
|
|
|
|
Accumulated |
|
|
Carrying |
|
|
|
|
| (in thousands) |
|
Original Cost |
|
|
Amortization |
|
|
Value |
|
|
Useful Life |
|
Patents |
|
$ |
10,853 |
|
|
$ |
(1,684 |
) |
|
$ |
9,169 |
|
|
|
5-20 |
|
Licenses |
|
|
11,123 |
|
|
|
(4,431 |
) |
|
|
6,692 |
|
|
|
3-17 |
|
Trademarks |
|
|
128 |
|
|
|
(64 |
) |
|
|
64 |
|
|
|
3-20 |
|
Trade name |
|
|
4,741 |
|
|
|
— |
|
|
|
4,741 |
|
|
Indefinite |
|
Other intangibles |
|
|
22,807 |
|
|
|
(7,137 |
) |
|
|
15,670 |
|
|
|
3-20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal intangibles |
|
|
49,652 |
|
|
|
(13,316 |
) |
|
|
36,336 |
|
|
|
|
|
Goodwill |
|
|
50,430 |
|
|
|
(723 |
) |
|
|
49,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles and goodwill |
|
$ |
100,082 |
|
|
$ |
(14,039 |
) |
|
$ |
86,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate amortization expense on intangible assets recorded for fiscal 2008, 2007 and 2006 was
$5.2 million, $2.5 million and $2.3 million, respectively. The following table summarizes the estimated
aggregate amortization expense for each of the five succeeding fiscal years:
| |
|
|
|
|
| |
|
Estimated Amortization |
|
| Year Ended |
|
Expense (in thousands) |
|
March 31, 2009 |
|
$ |
6,036 |
|
March 31, 2010 |
|
$ |
5,123 |
|
March 31, 2011 |
|
$ |
4,007 |
|
March 31, 2012 |
|
$ |
3,452 |
|
March 31, 2013 |
|
$ |
3,203 |
|
The changes in the carrying amount of goodwill for fiscal 2008 and 2007 were as follows:
| |
|
|
|
|
| (in thousands) |
|
|
|
|
Balance at March 31, 2006 |
|
$ |
11,878 |
|
Currency translation |
|
|
766 |
|
|
|
|
|
Balance at March 31, 2007 |
|
$ |
12,644 |
|
|
|
|
|
Goodwill acquired |
|
|
31,769 |
|
Currency translation |
|
|
5,294 |
|
|
|
|
|
Balance at March 31, 2008 |
|
$ |
49,707 |
|
|
|
|
|
74
Note J — Acquisitions
On July 2, 2007 the Company purchased all of the outstanding shares of Perouse Plastie SAS
(Perouse). Perouse is an international breast implant manufacturer based in France that currently
supplies a complete range of products for the European and Latin American markets. The Company paid
$53.5 million in cash (net of cash acquired). In addition, the Company incurred approximately $0.4
million in acquisition costs, bringing the total purchase price to $53.9 million.
The acquisition was accounted for using the purchase method of accounting and, accordingly, the
purchase price was allocated to the tangible and intangible net assets acquired on the basis of
their respective values on the acquisition date. The results of Perouse operations are included in
the Company’s consolidated results since acquisition date. Pro forma results of operations for
fiscal year 2008 and 2007 as though the acquisition had taken place at the beginning of each of the
periods presented, would not differ significantly from the actual results for those periods.
The following table summarizes the Company’s current estimates of the fair values of the assets
acquired and liabilities assumed at July 2, 2007. This allocation is preliminary and subject to
adjustments as the Company completes its review and evaluation of the acquired assets and assumed
liabilities, including finalizing its review of deferred tax assets and liabilities.
| |
|
|
|
|
| (In thousands) |
|
|
|
|
Cash |
|
$ |
436 |
|
Accounts receivable |
|
|
3,508 |
|
Inventory |
|
|
8,953 |
|
Prepaid expenses and other current assets |
|
|
798 |
|
|
|
|
|
Total current assets |
|
|
13,695 |
|
|
|
|
|
|
Property, plant and equipment |
|
|
5,226 |
|
Intangible assets |
|
|
18,423 |
|
Goodwill |
|
|
31,769 |
|
Other assets |
|
|
39 |
|
|
|
|
|
Total assets acquired |
|
$ |
69,152 |
|
|
|
|
|
|
|
|
|
|
Liabilities associated with acquisition: |
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
8,185 |
|
Other long-term liabilities |
|
|
7,071 |
|
|
|
|
|
Total liabilities assumed |
|
$ |
15,256 |
|
|
|
|
|
Net assets acquired |
|
$ |
53,896 |
|
|
|
|
|
Of the $18.4 million of acquired intangible assets, $8.7 million was assigned to developed
technology with a useful life of seven years (based on the excess earnings method under the income
approach), $5.4 million was assigned to customer relationships with a four year life for
distributors (based on the with and without method under the income approach) and an eight year
life for physicians and hospitals (based on the excess earnings method under the income approach),
$0.3 million was assigned to a covenant not to compete with a useful life of three years (based on
the with and without method under the income approach), and $4.0 million was assigned to trade
names (based on the royalty relief method), which have an indefinite life and is therefore not
subject to amortization. The weighted average amortization period for the intangible assets with
definite lives is 6.5 years.
Of the $7.1 million in other long-term liabilities, $4.2 million is the long-term portion of
deferred taxes related to the intangibles acquired. The remaining $2.9 million is the long-term
portion of capital lease obligations and outstanding bank loans assumed.
75
Note K — 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) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Net income from continuing operations: as reported |
|
$ |
54,951 |
|
|
$ |
57,624 |
|
|
$ |
48,079 |
|
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 |
|
$ |
58,159 |
|
|
$ |
60,832 |
|
|
$ |
51,287 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, |
|
| (in thousands) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Net income from discontinued operations |
|
$ |
8,464 |
|
|
$ |
232,990 |
|
|
$ |
14,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income: as reported |
|
$ |
63,415 |
|
|
$ |
290,614 |
|
|
$ |
62,357 |
|
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 |
|
$ |
66,623 |
|
|
$ |
293,822 |
|
|
$ |
65,565 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, |
|
| (in thousands, except per share data) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Weighted average outstanding shares: basic |
|
|
35,375 |
|
|
|
41,960 |
|
|
|
42,995 |
|
Restricted grants |
|
|
296 |
|
|
|
152 |
|
|
|
140 |
|
Shares issuable through exercise of stock options |
|
|
538 |
|
|
|
1,000 |
|
|
|
1,901 |
|
Shares issuable through convertible notes |
|
|
5,175 |
|
|
|
5,151 |
|
|
|
5,138 |
|
Shares issuable through warrants |
|
|
65 |
|
|
|
829 |
|
|
|
696 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average outstanding shares: diluted |
|
|
41,449 |
|
|
|
49,092 |
|
|
|
50,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
1.55 |
|
|
$ |
1.37 |
|
|
$ |
1.12 |
|
Discontinued operations |
|
$ |
0.24 |
|
|
$ |
5.55 |
|
|
$ |
0.33 |
|
Basic earnings per share |
|
$ |
1.79 |
|
|
$ |
6.93 |
|
|
$ |
1.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
1.40 |
|
|
$ |
1.24 |
|
|
$ |
1.01 |
|
Discontinued operations |
|
$ |
0.20 |
|
|
$ |
4.75 |
|
|
$ |
0.28 |
|
Diluted earnings per share |
|
$ |
1.61 |
|
|
$ |
5.99 |
|
|
$ |
1.29 |
|
Employee stock options
Shares issuable under the Company’s 2005 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 3.2 million, 183,500 and 1,000 shares for fiscal 2008, 2007 and 2006 respectively. This
calculation is performed on an instrument-by-instrument basis.
76
Convertible subordinated notes and warrants
The terms of the Company’s 2005 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 L.
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 L, 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 $38.9251. 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, 2008 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, 1.1 million and 1.8 million 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 year ended
March 31, 2008 exceeded the $38.9251 conversion price of the warrants. The impact of these
warrants was that 65,000 shares were added to the diluted shares and diluted earnings per share
calculation as of the fiscal year ended March 31, 2008.
Note L — 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 $28.9158 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; |
| |
• |
|
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 dividend increases,
the conversion price has been adjusted to $28.9158, and each $1,000 principle amount will be
convertible into 34.5832 shares of common stock.
77
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 $38.9251. 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.
Note M — Share Repurchase Program
The Company has a share repurchase program, primarily to reduce the overall number of shares
outstanding and to offset the dilutive effect of our employee equity compensation and dilution
related to our convertible notes from the inclusion of contingently convertible debt in fully
diluted earnings per share calculations.
On June 16, 2006, the Company entered into a stock purchase plan with Citigroup Global Markets Inc.
for the purpose of repurchasing up to 5.0 million shares of the Company’s common stock, up to a
cumulative purchase price of $166 million, under a Rule 10b5-1 Plan (the “2006 10b5 Plan”)
compliant with Rule 10b-18. In connection with the entry into the 2006 10b5 Plan, the Company’s
Board of Directors increased the authorized number of shares available for repurchase pursuant to
the stock repurchase program from 3.3 million to 5.0 million shares. The Company repurchased 4.1
million shares of its common stock for a total purchase price of $166 million under the 2006 10b5
Plan, and this 10b5 Plan terminated on June 15, 2007.
On June 18, 2007, the Company entered into a second Rule 10b5-1 stock purchase plan compliant with
Rule 10b-18 (the “2007 10b5 Plan”) with Citigroup Global Markets Inc. for the purpose of
repurchasing its common stock, up to a cumulative purchase price of $200 million. In connection
with the entry into the 2007 10b5 Plan, the Company’s Board of Directors increased the authorized
number of shares available for repurchase pursuant to our
stock repurchase program by 5.0 million shares. The Company repurchased 4.8 million shares of its
common stock under
the 2007 10b5 Plan for a total purchase price of $200 million. Although 0.8 million shares
remained authorized for future repurchases under the Company’s stock repurchase program as of March
31, 2008, authorized funding for the 2007 10b5 Plan has been exhausted. The 2007 10b5 Plan
terminates on June 17, 2008.
78
For fiscal 2008, the Company repurchased 9.0 million shares of its common stock for a total
purchase price of $367.7 million, of which 8.7 million shares were purchased for $357.8 million
under the 10b5 plans.
In addition to the shares repurchased under the 10b5 plans, the Company acquired an additional
16,000 shares for a purchase price of $0.7 million for the payment of withholding taxes related to
the lapsing of restrictions on certain outstanding restricted stock grants during fiscal 2008.
All shares previously repurchased under the program have been retired and are no longer deemed to
be outstanding. The timing of repurchases is subject to market conditions, cash availability and
to the terms of any 10b5 Plan in place at that time. 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,
a portion of which was utilized in the repurchases described above, leaving a remaining amount of
$31.6 million as of March 31, 2008. In addition, after the $400 million is utilized for such
repurchases, the Company may repurchase during any four consecutive quarters additional equity
securities in an amount limited to the Company’s consolidated net income, less dividends paid, for
the preceding four quarters. See Note F — “Short Term Bank Borrowings” for additional information
on the Credit Agreement.
Note N — Commitments
The Company’s manufacturing, warehousing and administrative offices in Bornel, France are leased
under a non-cancelable lease classified as a capital lease. Leased property under the capital
lease as of March 31, 2008, net of $0.1 million of accumulated amortization, totals $1.1 million
and is included as part of “Property and equipment, net” in the Company’s consolidated balance
sheet. The Company leases certain facilities under non-cancelable operating leases with unexpired
terms ranging from one to nine years. Most leases contain renewal options. Rental expense
included in continuing operations for these leases was $4.4 million, $4.0 million and $3.9 million
for fiscal 2008, 2007 and 2006, respectively. Future minimum lease payments (net of non-cancelable
sublease rentals) under operating and capital lease arrangements at March 31, 2008 were as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Capital |
|
|
Operating |
|
| (in thousands) |
|
Lease |
|
|
Leases |
|
2009 |
|
$ |
144 |
|
|
$ |
4,474 |
|
2010 |
|
|
169 |
|
|
|
4,415 |
|
2011 |
|
|
169 |
|
|
|
4,119 |
|
2012 |
|
|
169 |
|
|
|
3,449 |
|
2013 |
|
|
169 |
|
|
|
2,018 |
|
Thereafter |
|
|
575 |
|
|
|
2,816 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,395 |
|
|
$ |
21,291 |
|
|
|
|
|
|
|
|
Less: Amounts representing interest costs |
|
|
171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net present value |
|
|
1,224 |
|
|
|
|
|
Less: Capital lease obligations included in
short-term debt |
|
|
144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term capital lease obligations |
|
$ |
1,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Future minimum rental commitments to be received under non-cancelable subleases totaled
approximately $2.4 million at March 31, 2008.
79
During fiscal 2008, the Company amended an existing supply and distribution agreement with Misonix,
Inc. to include a commitment by the Company to purchase approximately $1.0 million of liposuction
systems prior to September 30, 2008. As of March 31, 2008, the Company had remaining purchase
obligations of approximately $0.5 million under that agreement.
Note O — Related Party 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 represented
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.
Note P — 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 and free product replacement. 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, the
Company 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 information developed using
actuarial techniques. The accrual is analyzed periodically for adequacy. As a result of these
periodic analyses, the Company recorded adjustments reducing its domestic and international
warranty reserves by $3.3 million and $0.4 million, respectively, during fiscal 2008.
The following table presents changes in the Company’s short-term and long-term accrued product
warranty reserves for fiscal 2008 and 2007.
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, |
|
| (in thousands) |
|
2008 |
|
|
2007 |
|
Beginning warranty reserves |
|
$ |
14,308 |
|
|
$ |
13,603 |
|
Cost of warranty claims |
|
|
(2,702 |
) |
|
|
(3,225 |
) |
Accrual for product warranties |
|
|
3,990 |
|
|
|
3,930 |
|
Adjustments made to accruals related to
pre-existing warranties |
|
|
(3,652 |
) |
|
|
— |
|
|
|
|
|
|
|
|
Ending warranty reserves |
|
$ |
11,944 |
|
|
$ |
14,308 |
|
|
|
|
|
|
|
|
80
Note Q — Contingencies
Warranty, product liability and related claims are a regular and ongoing aspect of the medical
device and biologics industries. 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 and related claims, 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 and related claims arising out of its discontinued products,
including urology products sold prior to the June 2, 2006 closing date of the sale of the Urology
Business to Coloplast. 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. 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, 2008 and March 31, 2007, the Company had
established reserves of $2.4 million and $2.7 million, respectively, 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, 2008 and March 31, 2007, the Company had established
additional reserves of $4.5 million and $3.8 million, respectively, 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.
The Company also offers limited warranty coverage on some of its products (see Note P for details).
While the Company engages in extensive product quality programs and processes, including actively
monitoring and evaluating the quality of its raw material and 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.
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.
Note R — Long-Lived Asset Impairment 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.
Note S — 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 $1.5 million, $1.1 million and $0.9 million for fiscal years 2008, 2007 and 2006,
respectively.
81
The Company’s subsidiary in the Netherlands employed approximately 210 people and 180 people, as of
March 31, 2008 and 2007, respectively, to which it offers a defined benefit plan. As of March 31,
2008, the projected benefit obligation, plan assets, accrued pension costs, and unrecognized
actuarial gains were $2.3 million, $1.6 million, $0.7 million and $0.2 million, respectively. 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.
Note T — Discontinued Operations
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. 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. Operations associated
with these discontinued 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 provided by discontinued operations for fiscal 2008 was $8.5 million, which includes
approximately $8.8 million in income tax benefits related to the gain on the sale of the Urology
Business.
At the end of last year, the Company computed its best estimate of the gain on the sale of the
Company’s Urology Business. During the preparation of the fiscal 2007 federal income tax return,
more facts and information became available that allowed us to refine and more accurately compute
the Company’s original estimate of the book and tax differences on the sale and the resulting
provision on the gain on sale, including the effect of foreign tax credits generated from the sale.
The current year benefit of $8.8 million in discontinued operations reflects the impact of
adjusting the prior year provision estimate to reflect these factors.
Net sales from discontinued operations were $38.4 million and $235.5 million for fiscal years 2007
and 2006, respectively. Income (loss) before income taxes from discontinued operations was ($0.3)
million, $3.6 million and $24.8 million for fiscal years 2008, 2007 and 2006, 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.
82
Note U — 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) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Principal products net sales |
|
|
|
|
|
|
|
|
|
|
|
|
Breast aesthetics |
|
$ |
328,027 |
|
|
$ |
262,556 |
|
|
$ |
233,189 |
|
Body contouring |
|
|
15,212 |
|
|
|
16,734 |
|
|
|
17,782 |
|
Other aesthetics, including facial products |
|
|
29,969 |
|
|
|
22,684 |
|
|
|
17,301 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
373,208 |
|
|
$ |
301,974 |
|
|
$ |
268,272 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ending March 31, |
|
| (in thousands) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Geographic area net sales |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
257,250 |
|
|
$ |
217,785 |
|
|
$ |
192,764 |
|
Canada |
|
|
20,381 |
|
|
|
16,234 |
|
|
|
15,178 |
|
All other countries |
|
|
95,577 |
|
|
|
67,955 |
|
|
|
60,330 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
373,208 |
|
|
$ |
301,974 |
|
|
$ |
268,272 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
At March 31, |
|
| (in thousands) |
|
2008 |
|
|
2007 |
|
Geographic area long-lived assets |
|
|
|
|
|
|
|
|
United States |
|
$ |
58,229 |
|
|
$ |
41,792 |
|
France |
|
|
61,613 |
|
|
|
26 |
|
Netherlands |
|
|
17,039 |
|
|
|
15,263 |
|
All other countries |
|
|
7,414 |
|
|
|
6,209 |
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
144,295 |
|
|
$ |
63,290 |
|
|
|
|
|
|
|
|
83
Note V — Quarterly Financial Data (Unaudited)
The following is a summary of unaudited quarterly results of operations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended March 31, 2008 |
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
Net sales |
|
$ |
95,564 |
|
|
$ |
85,390 |
|
|
$ |
92,860 |
|
|
$ |
99,394 |
|
Gross profit |
|
|
74,340 |
|
|
|
59,910 |
|
|
|
66,722 |
|
|
|
73,241 |
|
Net income from continuing operations |
|
|
21,744 |
|
|
|
10,029 |
|
|
|
12,112 |
|
|
|
11,066 |
|
Net income (loss) from discontinued
operations, net of tax |
|
|
(6 |
) |
|
|
(111 |
) |
|
|
(170 |
) |
|
|
8,751 |
|
Net income |
|
$ |
21,738 |
|
|
$ |
9,918 |
|
|
$ |
11,942 |
|
|
$ |
19,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.54 |
|
|
$ |
0.29 |
|
|
$ |
0.36 |
|
|
$ |
0.33 |
|
Discontinued operations |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(0.01 |
) |
|
$ |
0.26 |
|
Basic earnings per share |
|
$ |
0.54 |
|
|
$ |
0.29 |
|
|
$ |
0.36 |
|
|
$ |
0.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.48 |
|
|
$ |
0.27 |
|
|
$ |
0.32 |
|
|
$ |
0.30 |
|
Discontinued operations |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(0.01 |
) |
|
$ |
0.22 |
|
Diluted earnings per share |
|
$ |
0.48 |
|
|
$ |
0.26 |
|
|
$ |
0.32 |
|
|
$ |
0.53 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended March 31, 2007 |
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
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 |
|
84
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, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
4,534 |
|
|
$ |
1,598 |
|
|
$ |
622 |
|
|
$ |
5,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product liability reserves |
|
$ |
6,555 |
|
|
$ |
503 |
|
|
$ |
113 |
|
|
$ |
6,945 |
|
Accrued sales returns and allowances |
|
|
18,590 |
|
|
|
5,494 |
|
|
|
6,740 |
|
|
|
17,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,145 |
|
|
$ |
5,997 |
|
|
$ |
6,853 |
|
|
$ |
24,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
4,616 |
|
|
|
1,524 |
|
|
|
1,606 |
|
|
$ |
4,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product liability reserves |
|
$ |
6,701 |
|
|
$ |
418 |
|
|
$ |
564 |
|
|
$ |
6,555 |
|
Accrued sales returns and allowances |
|
|
15,544 |
|
|
|
12,651 |
|
|
|
9,605 |
|
|
|
18,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22,245 |
|
|
$ |
13,069 |
|
|
$ |
10,169 |
|
|
$ |
25,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
3,839 |
|
|
$ |
1,804 |
|
|
$ |
1,027 |
|
|
$ |
4,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product liability reserves |
|
$ |
5,232 |
|
|
$ |
1,732 |
|
|
$ |
263 |
|
|
$ |
6,701 |
|
Accrued sales returns and allowances |
|
|
13,162 |
|
|
|
9,049 |
|
|
|
6,667 |
|
|
|
15,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,394 |
|
|
$ |
10,781 |
|
|
$ |
6,930 |
|
|
$ |
22,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
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, 2008 |
/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, Chief Executive Officer and Director
(Principal Executive Officer)
|
|
May 30, 2008 |
| /s/ Michael O’Neill
Michael O’Neill |
|
Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
|
|
May 30, 2008 |
| /s/ Joseph E. Whitters
Joseph E. Whitters |
|
Chairman of the Board
|
|
May 30, 2008 |
| /s/ Michael L. Emmons
Michael L. Emmons |
|
Director
|
|
May 30, 2008 |
| /s/ Walter W. Faster
Walter W. Faster |
|
Director
|
|
May 30, 2008 |
| /s/ Margaret H. Jordan
Margaret H. Jordan |
|
Director
|
|
May 30, 2008 |
| /s/ Katherine S. Napier
Katherine S. Napier |
|
Director
|
|
May 30, 2008 |
| /s/ Burt E. Rosen
Burt E. Rosen |
|
Director
|
|
May 30, 2008 |
86
EXHIBIT INDEX
| |
|
|
| Item Number |
|
|
2.1 |
|
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. |
|
|
|
2.2 |
|
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. |
|
|
|
2.3 |
|
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(a) of the Registrant’s Annual Report on Form 10-K
for the year ended March 31, 2003. |
|
|
|
3.2 |
|
Articles of Amendment to Restated Articles of Incorporation of
Mentor Corporation — Incorporated by reference to Exhibit 3.1
on Form 8-K filed on October 3, 2007. |
|
|
|
3.3 |
|
Amended and Restated Bylaws of Mentor Corporation —
Incorporated by reference to Exhibit 3.2 on Form 8-K filed on
September 21, 2007. |
|
|
|
4.1 |
|
Indenture 23/4% Convertible Subordinated Notes Due 2024, dated
December 22, 2003 — Incorporated by reference to Exhibit 4(a)
of the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended December 31, 2003. |
|
|
|
10.1* |
|
Mentor Corporation Employee Stock Purchase Plan —
Incorporated by reference to Exhibit 10.8 of the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended September
30, 2005. |
|
|
|
10.2 |
|
Lease Agreement, dated November 10, 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. |
|
|
|
10.3 |
|
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. |
|
|
|
10.4 |
|
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. |
|
|
|
10.5 |
|
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. |
|
|
|
10.6 |
|
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. |
87
EXHIBIT INDEX (continued)
| |
|
|
| Item Number |
10.7 |
|
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. |
|
|
|
10.8 |
|
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. |
|
|
|
10.9 |
|
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. |
|
|
|
10.10 |
|
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. |
|
|
|
10.11* |
|
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. |
|
|
|
10.12 |
|
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. |
|
|
|
10.13* |
|
Mentor Corporation Form of 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. |
| |
10.14 |
|
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. |
|
|
|
10.15 |
|
Credit Agreement dated May 25, 2005, between Mentor Corporation, Bank of
the West, Union Bank of California, N.A. and Wells Fargo, N.A. —
Incorporated by reference to Exhibit 99.1 of the Registrant’s Current
Report on Form 8-K filed June 2, 2005. |
|
|
|
10.16 |
|
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. |
|
|
|
10.17* |
|
Mentor Corporation 2005 Long-Term Incentive Plan Form of 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. |
|
|
|
10.18 |
|
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. |
88
EXHIBIT INDEX (continued)
| |
|
|
| Item Number |
10.19 |
|
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. |
| |
|
|
10.20* |
|
2005 Long-Term Incentive Plan 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. |
| |
|
|
10.21* |
|
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. |
| |
|
|
10.22* |
|
Form of Indemnification Agreement — Incorporated by reference
to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K
filed on November 29, 2006. |
| |
|
|
10.23 |
|
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. |
| |
|
|
10.24* |
|
Amended and Restated 2007 Strategic Equity Incentive Plan
under the 2005 Long-Term Incentive Plan — Amended September
18, 2007— Incorporated by reference to Exhibit 10.1 of the
Registrant’s Quarterly Report on Form 10-Q for the quarter
ended September 28, 2007. |
| |
|
|
10.25* |
|
Separation and Release Agreement dated October 27, 2007,
between Mentor Corporation and Loren L. McFarland —
Incorporated by reference to Exhibit 10.1 of the Registrant’s
Current Report on Form 8-K filed on October 30, 2007. |
| |
|
|
10.26* |
|
Consulting Agreement dated October 27, 2007, between Mentor
Corporation and Loren L. McFarland — Incorporated by
reference to Exhibit 10.2 of Registrant’s Current Report on
Form 8-K filed on October 30, 2007. |
| |
|
|
10.27* |
|
Mentor Corporation 1991 Long-Term Incentive Plan as amended
and restated as of September 17, 2007 — Incorporated by
reference to Exhibit 10.1 of the Registrant’s Quarterly Report
on Form 10-Q for the quarter ended December 28, 2007. |
| |
|
|
10.28* |
|
Mentor Corporation 2005 Long-Term Incentive Plan as amended
and restated as of September 17, 2007 — Incorporated by
reference to Exhibit 10.2 of the Registrant’s Quarterly Report
on Form 10-Q for the quarter ended December 28, 2007. |
| |
|
|
10.29* |
|
Employment Agreement with Joshua Levine dated as of December
21, 2007 — Incorporated by reference to Exhibit 10.7 of the
Registrant’s Quarterly Report on Form 10-Q for the quarter
ended December 28, 2007. |
89
EXHIBIT INDEX (continued)
| |
|
|
| Item Number |
10.30* |
|
Employment Agreement with Michael O’Neill dated as of December 21, 2007 — Incorporated by
reference to Exhibit 10.8 of the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended December 28, 2007. |
| |
|
|
10.31* |
|
Agreement with Joseph A. Newcomb dated as of December 21, 2007 — Incorporated by reference
to Exhibit 10.9 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
December 28, 2007. |
| |
|
|
10.32* |
|
Employment Agreement with Edward S. Northup dated as of December 21, 2007 — Incorporated by
reference to Exhibit 10.10 of the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended December 28, 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 — Michael O’Neill. |
| |
|
|
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 — Michael O’Neill. |
| |
|
|
| * |
|
Management contract or compensatory plan or arrangement. |
90